Risks and Rewards
All trading involves risk, commissions and other fees, and potential tax implications. Before you begin trading, educate yourself about how stocks are traded on the NYSE and NASDAQ markets and how earnings reports, market forces, and company changes can impact stock prices. This knowledge will help you become a more responsible self-directed investor.
Taxes and Commissions
When you buy or sell shares of stock, you must pay commissions and other fees that can negatively impact your rewards. The more frequently you buy and sell, the more commissions you rack up. Also, investing may create a taxable event. Be sure to consult a tax professional.
Fluctuating stock prices
If buyers are more forceful than sellers, demand takes over and stock prices rise. If sellers are more powerful, supply becomes abundant and prices fall. If the strength of either side is closely matched, a tug-o-war ensues and prices don't fluctuate.
Another factor influencing stock price is the company's earnings, or how profitable it is. Every quarter, the Securities and Exchange Commission (SEC) requires publicly traded companies to release earnings statements which indicate exactly how much they've profited (or lost) during the prior three months.
Earnings reports are important to short- and long-term traders for different reasons. Long-term traders will keep their investment if they're reassured that the company is performing as promised. For a trader focused on the short-term, price movement can become quite volatile.
What if the company goes bankrupt?
Despite best intentions, sometimes seemingly profitable companies will declare bankruptcy. Unfortunately for you and the other shareholders, the company's creditors and bondholders have priority to their assets during bankruptcy and liquidation procedures.On the plus side, as a shareholder in a publicly traded company, you are protected by limited liability. The most you can lose is the amount you invested in the company's stock. You are not personally liable for any of the company's outstanding debts.