Introduction to the stock market

by UseYourTheta
Introduction to the stock market

So what is the Stock market, what is a Stock and how do people make money in that market? How is a trade structured and what are the fees? Here is the super basic version:

A stock

A stock is a part of a company. If a company is worth  $1000 and has 100 shares than the share price is $10 because 100 shares *$10=$1000. In this example all the companie’s shares are traded at an exchange (exchange means basically a “place” where one can buy and or sell shares). Normally less than 100% of a company is traded at an exchange because whoever owns more than 50% of a company’s shares has basically the dictating rights what to do.

The stock market

This is where stocks (parts of a company are traded). Every country has different exchanges and they trade in their own currency. A stock can be traded only at one exchange of one country, in a few exchanges of one country or in several exchanges of several countries.

Broker

A broker is basically a service platform where you can buy and sell stocks. You have to apply, identify yourself and then wire some money to them in order to buy stocks. There are different brokers out there. I recommend you do a google search which broker is the cheapest in your country from a fee perspective.

Bid/Ask Spread

If a person wants to buy a stock they pay the “ask” price (they are asking for a price). Whereas somebody who wants to sell can get the “bid” price for the stock he is selling.

Normally the bid price is a little below the ask price. That means if someone would buy a stock and instantly sell it he would lose money equal to the bid/ask spread (+transaction fees). The spread exist because of market makers.

Transaction fees

Whenever you buy or sell a stock you have to pay a fee (except for a few american brokers afaik). The fee is either a flat amount, an order percentage or both. Normally it will be something like this:

  • $6 per order
  • $6+ 0.25% of your order
  • 0.5% of your order
  • $14 per order under $10.000 order volume
  • $25+0.5% above $10.000 oder volume

Always make sure you have a broker with low fees. Especially if you trade with small capital make sure the fees are at most 1% of you order!

 

Trading example

Broker fees: $4 +0.5% of order

You buy 100 shares of Intel @ $49. Your order would be $4.900. Additionally you would have to pay $4+0.005*4900 = $28.5 . After a few weeks you happily sell @ $52. The difference between start and selling price would be $52-$49=$3 per share. Therefore you would have made $300 profit before fees and taxes. The selling process will cost fees again and because your order went up in value you have to recalculate the fees. Selling fees are $4+0.005*($4900+$300)=$30.

After fees you would have made $300-$28.5-$30=$241.5. You see that you would have lost out on roughly 20% of your gains due to fees. Additionally, you have to pay taxes on your capital gains. In germany the taxes would be ~25% of your profit (=$241.5).

If you are already familiar with the concept above try having a look at why investing is important .

Take away

  • Fees can take a lot of your investment gains, especially if you use small investments. Try to save up some money to reduce your investment-actions in order to save fees. Obviously this only applies to flat fees, for percentual this won’t make a difference.
  • Choose your broker carefully as it will determine how much fees you have to pay.
  • When choosing your investments make sure the bid/ask spread is relative small (percentage wise) in order to make the most out of your order. For example a bid/ask spread of 2% would mean that the stock has to increase by 2% before you would break even by selling. And this doesn’t even take fees into account.

 

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