What are Stocks?


Stocks are shares in a company. When you invest in a company’s stock or buy its shares, you own part of a company. In general, if the company makes money over a long period of time, your stock may increase in value. Though, stocks are risky, and you may potentially loose all your money.

  • Good potential for growth in the long-term.
  • Riskier investment compared to other types of investments.
  • Returns are not guaranteed.

Voting Rights
Generally, a stock holder has proportionate voting right in the election of the company’s board of directors and in special circumstances such as a merger or acquisition. As a shareholder, you are entitled to receive quarterly reports and an annual report informing you of the financial health of the company. As a shareholder, you’ll be invited to attend the annual shareholders’ meeting every year. Most companies use a one-vote-one-share system. Every vote counts. If you cannot go to the annual shareholder’s meeting, you will be sent an absentee ballot.

How are stocks valued
Prices of stocks are determined by the demand and supply for the stock. Investors determine the price by choosing to buy or sell the stock at a certain price. Prices of widely traded stocks change several times during a trading day. Prices of thinly traded stocks may change once a week or so. Stock analyst recommendations also influence what investors are willing to pay for the stock. Analysts and investors base their beliefs about stock prices on many factors such as historical earnings, perceptions about quality of management, perceived strength of sector performance, current and historical prices of the stock, perceptions about mergers or acquisitions.

Stock Selection
Considering the fact that stocks as an asset class are riskier (ie. you may loose money) investments than cash or bonds, it is critical that you study every company in which you buy stock. Consider what analysts predict in earnings for the company’s future. One should not be completely deterred by the risk involved because history has time and again demonstrated that stocks outperform every other type of investment over long periods of time as evidenced by the following table.

Comparison of Annual Rates of Return on Selected Investments (%)

1945 – 1994

1984 – 1994

1989 – 1994

Inflation

4.4

3.6

3.5

S & P 500

11.9

14.4

8.7

U.S. Treasury Bills

4.7

5.8

4.7

U.S. Govt Bond

5.0

11.9

8.3

Corporate Bond

5.3

11.6

8.4

Residential Housing

N/A

4.3

2.9

Gold

6.4

0.7

0.1

Silver

4.6

-4.2

-0.8

Source: Ibbotson Associates Annual Yearbook, Ibbotson Associates, 1995

If you research well, make prudent selections, view your investment as long term, adopt a buy and hold strategy, and patiently ride out market volatility, chances are good that your stock portfolio may reward you with returns that substantially exceed returns on other investment vehicles.

Stock Investing Basics
In today’s economy, buying stock can be a scary experience, especially if you don’t think of yourself as particularly stock-savvy. You definitely need a little more advice than the old “buy low, sell high” line before you take the stock buying plunge.

That’s okay. All of us do. Because first of all, stocks aren’t just mere pieces of paper, they’re actually shares in the companies. That means that you own a part of the company. When you buy stock in any company, you’re investing in that company’s products, and in return, you have a claim in its assets and earnings.

So how do you know which company or companies stock to buy? One of the first things you need to do is research any company you’re interested in. Find out how the stock not only is performing now, but track how that stock has performed over the two years, at least.

Also look for information on any mergers, acquisitions, new product launch(es), and major changes in management. These can have a dramatic affect, good and bad, on the future earnings of a company. Knowing about these things in advance can keep you from making risky stock purchases.

Don’t base your buying on price alone. A $2 stock in a new company that seems to be growing quickly may seem like a great deal. And it can be. But the returns on a $100 stock can be a lot higher if the company has high earning prospects. So comparison shop to find out where your stock dollars are likely to bring you’re the highest returns.

Remember that diversity is key when it comes to buying stocks. This means don’t put all your stock eggs in one basket. You want a wide variety of stock in your portfolio. Drug companies may be hot right now and seem like a good bet. But you should round out your stock purchases with maybe a leading electronics company and other companies that represent different categories of goods.

After you’ve bought your stocks, hold on to them stocks for a while. Fast trading can actually cost you a great deal of earnings in the long run, even though you are making some money quickly. The taxes are also higher on short-term stock trades, which definitely costs you money.

Finally, consider getting advice from a stockbroker. They’re trained to understand your investing needs and can help you with your investments. They can educate and guide you through the stock market maze, especially if you’re a beginner. A good one will be open to answering your questions and will listen to what sort of stocks you want to invest in. Always remember it’s your money and ultimately you decide what stocks you want to invest in.

 

Information is for educational and informational purposes only and is not be interpreted as financial advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.

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