Dividend Stocks and the Stock Market

To many people, the stock market is one large casino, where the rich and the poor risk their money to earn more. However, in reality, it is totally different. Let me begin by telling you about dividend stocks in very simple language. When large companies need money, they try to raise money from the public by selling a percentage of the stake of the company- these are called shares. So when you buy a share, you actually own a teeny-weeny bit of a large company.

The stock market is a platform meant for buying and selling these small stakes called shares. The price of a share is determined by how much a buyer is willing to pay for it by a process called bidding and how much the seller wants to sell it for. There are 3 major types of trading people do on the stock market:  intraday trading, short term trading, long term trading or investment.

Intraday trading

Such people buy shares at any time when the market is open and sell them during the day itself, using their understanding and judgment on where the share price will go during that particular day. They sit in front of their computer and sell and buy shares, making profit and sometimes, losing their money as well. Some people use sheer judgment while others use pattern analysis software and other such tools to assist them in predicting the future share price movement. At the end of the day all their ‘positions’ are ‘squared off’ and they have a net profit or loss.

Short term trading

People who do short term trading buy shares and keep them for a few days and try to sell them on profit. They use similar indicators of stock price movement and try to predict whether the stock will go up or down in the coming few days and try to sell and buy at the right times. They have to pay higher brokerage but the advantage is that they don’t have to sit in front of the market screens all the time and can buy and sell depending upon their convenience by just following the market in their free times. However, this may cause them to make lesser profits than they had originally anticipated.

Long term trading

These traders buy shares from the market but they choose companies based on what is called fundamental analysis. They try to find out the companies whose fundamentals are strong so that the company is at no chance of going bankrupt in the coming few years. They try to keep the money invested for a period of few years and sell the shares only when they really need the money. There is no guarantee or reassurance that the prices will definitely go up. However fundamentally strong companies obviously yield profits in the long term, just that the profit may be lesser. All in all it depends on the trader’s risk appetite and time commitment. The important thing is not to treat the stock market as a gamble and not to invest blindly.