Explain the nature of stocks

Stocks Basics: What Are Stocks? 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 Being an Owner Holding a company's stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim (albeit usually very small) to everything the company owns. Yes, this means that technically you own a tiny sliver of every piece of furniture, every trademark, and every contract of the company. As an owner, you are entitled to your share of the company's earnings as well as any voting rights attached to the stock.

Stocks Basics: What Are Stocks? A stock is represented by a stock certificate. This is a fancy piece of paper that is proof of your ownership. In today's computer age, you won't actually get to see this document because your brokerage keeps these records electronically, which is also known as holding shares "in street name". This is done to make the shares easier to trade. In the past, when a person wanted to sell his or her shares, that person physically took the certificates down to the brokerage. Now, trading with a click of the mouse or a phone call makes life easier for everybody.

Stocks Basics: What Are Stocks Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business. Instead, one vote per share to elect the board of directors at annual meetings is the extent to which you have a say in the company. For instance, being a Microsoft shareholder doesn't mean you can call up Bill Gates and tell him how you think the company should be run.

Stock Basics - Shareholders As part owner of a corporation, you may be entitled to share in the profits of the company. There is also a chance that the company will grow and the price of the stock may rise. If the company achieves economic success, the stock value will go up and stockholders will benefit. For example, if you invested $1,000 to buy 100 shares of a company at $10 each and the shares rose to $13 each you would gain $300. This is equivalent to a 30% return. In cases like this, both the stockholders and the business would be pleased.

Stock Basics – Reasons Individuals invest in Stocks Dividend Payments Dividend payments can work like additional income -- or for some, full-time income -- depending on the stocks invested in. People invest in stocks to take advantage of dividend payments, which are payments made to preferred shareholders from a portion of a company’s profits. For example, a stock that sells at $20 per share, with an annual dividend of $1, offers a 5 percent yield to the person investing in it.

Stock Basics – Reasons Individuals invest in Stocks Dividend Payments Dividend payments can work like additional income -- or for some, full-time income -- depending on the stocks invested in. People invest in stocks to take advantage of dividend payments, which are payments made to preferred shareholders from a portion of a company’s profits. For example, a stock that sells at $20 per share, with an annual dividend of $1, offers a 5 percent yield to the person investing in it.

Stock Basics – Reasons Individuals invest in Stocks Asset Allocation People invest in stocks to allocate their assets. Asset allocation involves investing in a variety of asset classes -- bonds, real estate, stocks or trusts -- to have a well-balanced investment portfolio. Since the goal of asset allocation is based on the long term, such as creating a nest egg for retirement, many use stocks to diversify their investment and create a potential for growth. According to Forbes, asset allocation also helps reduce an investor’s risk for a substantial loss if the market goes down -- but it doesn’t remove the risk entirely.

Stock Basics – Reasons Individuals invest in Stocks Capital Appreciation According to the U.S. Securities and Exchange Commission, a big reason people invest in stocks is for capital appreciation. Capital appreciation, also referred to as capital growth, refers to the increase in a stock’s market price. When the market price goes up, an investor can sell her stock for a higher price than it was originally purchased, thus creating a profit. For some investors, these profits can be substantial. Investors who hold on to their stocks long term – such as for several years -- may see lucrative returns

Stock Basic – Reasons Individuals invest in Stocks more convenient than hands-on ownership relatively easy to become educated about investing

Stock Basics – Reasons Individuals invest in Stocks Shareholders own equity in corporations through their shares. By holding shares in a corporation, an investor has the ability to vote and influence company-wide decisions. The majority shareholder, or the individual who controls more than half of the company’s outstanding shares, may have voting rights among the group of investors to help control the corporation. This situation only applies, however, if the person invests in stocks that carry voting rights

Explain reasons that companies issue stock Businesses issue stock to raise capital. Here are some of the advantages of issuing stock. •A Company can raise more capital than it could borrow. •A Company does not have to make periodic interest payments to creditors. •A Company does not have to make principal payments.

Distinguish between common and preferred stock Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact, the majority of stock is issued is in this form. We basically went over features of common stock in the last section. Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management

Distinguish between common and preferred stock Preferred Stock Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium).

Role of stock exchanges in buying/selling stock The stock exchanges under the overall supervision of the regulatory authority provides a trading platform, where buyers and sellers can meet to transact in securities. The trading platform provided by NSE is an electronic one and there is no need for buyers and sellers to meet at a physical location to trade. They can trade through the computerized trading screens available with the NSE trading members or the internet based trading facility provided by the trading members of NSE.

Performance Activity Discuss the relationship between the value of a company’s stock and its stock price. What do’s and Don’t should an investor bear in mind when investing in the stock market?

Performance Activity