INVESTING Introduction to the Stock Market, Bonds, and Mutual Funds

What is a stock? Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing. What is a stock?

Stock Certificate

Being an Owner Holding a company's stock means that you are one of the many owners (shareholders) of a company. You are entitled to your share of the company's earnings and any voting rights attached to the stock. Being a shareholder of a public company does not mean have a say in the day-to-day running of the business. Instead one vote per share elects the board of directors is the extent of you say in the company’s operations. Profits are sometimes paid out in the form of dividends. A dividend is the amount of profit that a shareholder earns for each share of stock. The term comes from dividing profits at the end of an earning period.dividends The more shares you own, the larger the portion of the profits you get. Another extremely important feature of stock is its limited liability, which means that, as an owner of a stock, you are not personally liable if the company is not able to pay its debts.

“Without risk there can be no reward” Stocks are not insured. There are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many others do not. And there is no obligation to pay out dividends even for those firms that have traditionally given them. Without dividends, an investor can make money on a stock only if the price of the stock goes up. On the downside, any stock may go bankrupt, in which case your investment is worth nothing.

What can a company do with its profits? Keep the money Reinvest in the company. Invest in new technology, buy new equipment, or expand the business. Pay its owners Give out dividends

What is a Bond? A bond is commonly used to refer to any securities that are founded on debt. When you purchase a bond, you are lending out your money to a company or government. In return, they agree to give you interest on your money and eventually pay you back the amount you lent out.bond Thousands of investors then each lend a portion of the money needed. A bond is nothing more than a loan for which you are the lender. The organization that sells a bond is known as the issuer. You can think of a bond as an IOU given by a borrower (the issuer) to a lender (the investor). The main attraction of bonds is their relative safety. If you are buying bonds from a stable government, your investment is virtually guaranteed, or risk- free. The safety and stability, however, come at a cost. Because there is little risk, there is little potential return. As a result, the rate of return on bonds is generally lower than other securities.

What is a Mutual Fund? A mutual fund is a collection of stocks and bonds.mutual fund When you buy a mutual fund, you are pooling your money with a number of other investors, which enables you (as part of a group) to pay a professional manager to select specific securities for you. The primary advantage of a mutual fund is that you can invest your money without the time or the experience that are often needed to choose a smart investment.

Who Cares? Why is the Stock Market Important? The stock market is important in the operation of the American economic system. Companies sell stock to raise funds for improvements and expansions. The stock market also plays a critical role in personal financial planning. Not only do many individuals directly purchase shares of stock as part of their personal financial strategies, most Americans have a large stake in the stock market through their retirement programs. The stock market dramatically illustrates how prices are (almost instantaneously) determined through the interaction of supply and demand in an auction-like environment.

How do stocks trade? 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 on a trading floor. exchanges

The New York Stock Exchange The most prestigious exchange in the world is the New York Stock Exchange (NYSE). The "Big Board" was founded over 200 years ago in 1792 with the signing of the Buttonwood Agreement by 24 New York City stockbrokers and merchants. Currently the NYSE, with stocks like General Electric, McDonald's, Apple, Coca-Cola, Exxon Mobil and Walmart, is the market of choice for the largest companies in America.

The Nasdaq The second type of exchange is the virtual sort called an over-the-counter (OTC) market, of which the Nasdaq is the most popular. These markets have no central location or floor brokers whatsoever. Trading is done through a computer and telecommunications network of dealers. It used to be that the largest companies were listed only on the NYSE while all other second tier stocks traded on the other exchanges. The tech boom of the late '90s changed all this; now the Nasdaq is home to several big technology companies such as Microsoft, Cisco, Intel, Dell and Oracle. The Nasdaq is becoming a serious competitor to the NYSE.

Blue Chip vs Penny Stocks Blue chip stocks are stocks of well-established companies that have stable earnings and no extensive liabilities. They have a track record of paying regular dividends, and are valued by investors seeking relative safety and stability. Blue chip stocks are worth the most and come from larger companies. The name comes from the blue-colored chips in the game of poker, which are typically the most valuable. Penny stocks are low-priced, speculative and risky securities which are traded over-the-counter (OTC); i.e. outside of one of the major exchanges. Penny stocks trade anywhere from a fraction of a cent to a few dollars. Penny stocks are a very risky investment and there is no guarantee against bankruptcy, but they represent an interesting opportunity to speculators who benefit from the incredibly low share price and the potential for enormous upside.

So what is the difference between income, value, and growth stocks? There are basically 3 ways to classify stocks Income stocks: offer a higher dividend in relation to their market price. These are stocks that in general pay dividends and are also considered to be less volatile than other stocks. People close to retirement sometimes buy these types of stocks as additional income because of the dividends they pay. Growth stocks: are securities which appreciate in value and yield a high return. Their profits are typically re-invested to expand the business. Investors gain because the stock prices increase as the business grows, thus increasing the value of the investment. They tend to be very more volatile, but offer the chance for big gains for the short term investor. These stocks usually little to no dividends. Value stocks: are securities which investors consider to be undervalued. They feel that the stock is being traded below market value, and they believe in the long-term growth of the issuing company. These stocks are considered to be from profitable companies that are selling at a reasonable price compared to their true worth. (think….On Sale!)