Basic Principles

• A basic principle of the stock market is supply and demand. A company issues shares of stock to be traded. Investors then purchase those shares. As more investors want those shares (demand), the stock price rises. If more shares become available for sale (supply), the stock price will fall. Many factors go into whether the shares of a company are desirable. However, if the company is successful, it stands to reason that share prices will rise. If the company is losing money, then the share prices will likely drop.
  
  

Bid and Ask

• The bid and the ask are the two prices that are associated with a stock on the market. The bid is the amount of money a buyer is willing to pay. The ask is the amount of money the seller is asking in return for his shares. When a bid and an ask are entered for the same amount, the exchange matches the order and executes the transaction.
  
  

Orders

• There are different types of orders that determine how shares are bought or sold. A "market" order means you want to buy or sell shares at the current market price. If you want to buy 1000 shares of Company X at $50 per share with a market order, you might be surprised to find you paid $52. This is because the market changes at lightning speed and you were matched with a seller asking $52 per share. A "limit" order means you are pre-setting a price that is the most you will pay or the least you will sell for. If you wanted to buy 1000 shares of Company X with a limit order of $50 per share, you would not purchase those shares until someone agreed to that price.
  
  

Term

• Whether you hold a position for the "short term" or "long term" is significant. Short term is defined as less than a year, while long term is defined as greater than a year. If you sell a stock and make a short-term gain, you will be taxed at 35 percent on that gain. If you hold the stock so that it qualifies as a long-term investment, you will only pay 15 percent tax on that gain.
  
  

Diversification

• There are certain words bandied about when investing in the market. One of those is "diversification." Diversification means investing in different sectors of the market. A sector represents an investment group such as the technology, health care or finance sector. By investing in different sectors, you are guarding against a downturn in any one particular sector. When you are building a portfolio, be sure to diversify in several different sectors.