Stocks

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Stocks

Introduction

Imagine being a business owner without having to go to work. What if you could sit back and watch the company grow and collect the dividend checks as the money rolls in? What I am talking about is stocks and investments. These tools are financial instruments for building wealth. Stocks are part of nearly any investment. Over the last few decades, the average person's interest in stocks has grown exponentially. Despite their popularity people don't fully understand stocks. Much is also learned around the campfire from people who don't know what they are talking about.

Misinformation is based on a get rich quick mentality. Just look at the dotcom craze of the late 10's and the early 000's. People thought the stocks were the answer to instant wealth. The dotcom crash proved that this is not the case. Stocks can create wealth but there are all levels of risk. The key to protecting yourself in the stock market is to understand where you are putting your money.

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What are stocks?

The definition of a stock is simple. It means a share in the ownership of a company. Stocks represent a claim on the company's assets and earnings. As you acquire more stock, your stake in the company becomes greater. Stocks are represented by a certificate or stock certificate. It's a fancy piece of paper that is proof of your ownership. Today the brokerage keeps the record of your certificate on an electronic file. This is done to make the trading easier. In the past they took the certificates down to the brokerage physically and traded them. Now trading is done by a click of the mouse.

Being a shareholder of a stock does not mean you have a say in the day to day operations. Instead you have one vote per share to select the board of directors at annual meetings. For instance, you can not call Bill Gates and tell him how to run the company. Also, you can not walk into a beer company that you own shares in and grab a free case of beer either. However you can vote to have the management removed. In some companies though, the management can own up to 51% of the stock.

Stocks mean you have a claim on the company's profits. Those are paid out in the form of dividends. The more shares you own the larger the portions you will receive. In a case of liquidation, you receive what's left after the creditors have been paid. The reason why a company issues a stock is that sometime a company needs to raise money. A company can borrow money or sell parts of it by issuing bonds. Both of these methods fit under the umbrella of debt financing. Issuing stock is called equity financing. It is important to understand the difference between a company financing through debt and financing through equity. A debt investment is a bond that you are guaranteed to the return of your

money along with promised interest payments. The case with equity payments is that you assume the risk of the company not being successful. If the company goes bankrupt and liquidates, you as the shareholder, don't get any payments until the banks and bondholders have been paid out. Shareholders earn a lot if the company is successful but lose their investment if the company is not successful.

Risk

It must be emphasized that there are no guarantees when it comes to stocks. Some companies pay out dividends but others may not. the downside is that any stock can go bankrupt. The brighter side though, is if you take on a high risk stock there is the possibility of a greater return on your investment.

Common stocks

Common stock is basically ownership in the company and a claim on the companies profits or dividends. Common stock by means of capital growth, yields higher returns than almost every other investment. The higher return comes at a cost as common stocks entail the most risk. If a company goes bankrupt, the shareholders of the common stock will not receive money until the creditors, bondholders and preferred shareholders are paid off.

Preferred stock

Preferred stock means ownership in the company but not the same voting rights. On preferred stocks, the shareholders are guaranteed a fixed dividend forever. Common stocks don't guarantee fixed dividends. Preferred stock can also be callable meaning that the company itself has the option to purchase the shares from the shareholders at a premium price. Common and preferred are the two forms of stock. It is possible for companies to customize stocks in any way they want. These two forms of stock have different voting rights. One class of stocks can have ten votes and another can only have one.

Stock trading and the Exchanges

Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price. Some exchanges are physical locations where transactions are carried out. A stock market is nothing more then a sophisticated farmers market. The places where the stocks are traded are The New York Stock Exchange (NYSE), which is the the most prestigious exchange in the world. The NASDAQ is the second exchange which also called an over the counter exchange. The NASDAQ has no central location. Trading is mostly done through a computer and a telecommunications network of dealers. The third largest stock exchange is the American Stock Exchange (AMEX). The AMEX use to be the alternative to the NYSE but that role has been changed by the NASDAQ. There are in just about every country in the world. American markets are undoubtedly the largest and by far more important. The other main financial hubs are in London, England and Hong Kong, China.

Changing prices

What causes stock prices to change is the supply and demand. If more people want to buy a stock the demand goes up therefore the supply goes up driving up the price.

Brokerages

The most common method to buying stocks is using a brokerage. There are two types of brokerages. The Full service brokerages will offer you expert advice and manage your account but will charge a lot. Discount brokerages offer little in the way of personal attention but are cheaper. Because of the internet today, investors can now afford to invest in the market.

How to read the Stock Quotes

Column 1 &

The highest and lowest a stock has traded over the previous 5 weeks. This does not include the previous days trading

Column

Company Name & Type of Stock. This column lists the name of the

company.

Column 4

Ticker Symbol. This is the unique alphabetic name which identifies the

stock.

Column 5

Dividend Per Share. This indicates the annual dividend payment per

share. If this space is blank, the company does not currently pay out dividends.

Column 6

Dividend Yield. The percentage return on the dividend.

Column 7

Price/Earnings Ratio. This is calculated by dividing the current stock

price by earnings per share from the last four quarters.

Column 8

Trading Volume. This figure shows the total number of shares traded

for the day, listed in hundreds.

Column & 10

Day High & Low. This indicates the price range the stock has

traded at throughout the days trading. In other words, these are the maximum and

the minimum people have paid for the stock.

Column 11

Close. The close is the last trading price.

Column 1

Net Change. This is the dollar value change in the stock price from the

previous days closing price.

Investment Styles

There are plenty of investment styles and strategies out there. On Wall street there are the bulls and the bears. The bull market means that everything in the economy is great. People are finding jobs and the stocks are rising. The bear market is when the economy is bad. When this happens, recession is looming, and stock prices are going down. Bear markets make it tough for investors to pick profitable stocks. There is one solution to this and it is to make money when the stocks are falling. This is a unique technique called short selling. Another strategy is to wait on the sidelines while the bear market is nearing its end in hopes of it turning into a bull market. The bulls and bears are constantly at odds. They both make money with the changing cycles of the market.

Conclusion

I chose this subject because of my interest in the subject and acquiring the knowledge to help others with it. My father was involved with Stocks and Trading in Wall Street and knows the best investment techniques. A typical solution for managing your stocks, is to consult your broker and keep a portfolio. Another solution is to balance between high, medium and low risk stocks. The trick to managing your stocks is being consistent with your investment and watching the growth or the decline of your stocks. If you think it will make money one day, the chances are it won't make money the next day. A lot of times a broker won't keep track of the stocks for you. I believe that brokers should watch the stocks for the investors as well and be available to re-allocate the investments if the investors request it. With the technology today we should also be able to do our own reallocation through the internet if the brokers are not available. I also believe that this method will keep money in the economy and reduce risks in investment. I also believe that this method will reduce tremendous losses. My father is a prime example. His clients have only lost five percent on their investments as opposed to others who have lost forty percent with other brokers. This report will help people understand what the stock market is and how and why companies issue stocks. Understanding stocks is the first step into the investment process and a clear and precise knowledge will help many investors make wise decisions. After reading this report I am hoping to introduce these ideas to others and help people make the right decisions.

1. Investopedia.Com

. Securities Industry Association -http//www.ccsd.cc.state.az.us/Investor_Education/Brochures/Product

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