The Stock Market

Investment Risk Tolerance Assessment http://pfp.missouri.edu/research_IRTA.html

What is a stock? You have probably heard a popular definition of what a stock is: “A 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.” Unfortunately, this definition is incorrect in some key ways. VIDEO

What is a mutual fund? A mutual fund is an investment vehicle made up of a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets. Mutual funds are operated by professional money managers, who allocate the fund's investments and attempt to produce capital gains and/or income for the fund's investors.  VIDEO

Stocks and shares? To start with, stock holders do not own corporations; they own shares issued by corporations. But corporations are a special type of organization because the law treats them as legal persons. In other words, corporations file taxes, can borrow, can own property, can be sued, etc. The idea that a corporation is a “person” means that the corporation owns its own assets. A corporate office full of chairs and tables belong to the corporation, and not to the shareholders.

Stocks and shares? What shareholders own are shares issued by the corporation; and the corporation owns the assets. So if you own 33% of the shares of a company, it is incorrect to assert that you own one-third of that company; it is instead correct to state that you own 100% of one-third of the company’s shares.

Stocks and shares? So what good are shares, then, if they aren’t actually the ownership rights we think they are? Owning stock gives you the right to vote in shareholder meetings, receive dividends (which are the company’s profits) if and when they are distributed, and it gives you the right to sell your shares to somebody else.

Stocks and shares? Stocks – sometimes referred to as equity or equities – are issued by companies to raise capital in order to grow the business or undertake new projects. There are important distinctions between whether somebody buys shares directly from the company when it issues them (in the primary market) or from another shareholder (on the secondary market). When the corporation issues shares, it does so in return for money.

Stocks and shares? Companies can instead raise money through borrowing, either directly as a loan from a bank, or by issuing debt, known as bonds. Bonds are fundamentally different from stocks in a number of ways. Bondholders are creditors to the corporation, and are entitled to interest as well as repayment of principal. 

Common Stock vs Preferred stock When people talk about stocks they are usually referring to common stock. In fact, the great majority of stock is issued is in this form. Common shares represent a claim on profits (dividends) and confer voting rights. Preferred Stock Preferred stock functions similarly to bonds, and usually doesn't come with the voting rights With preferred shares, investors are usually guaranteed a fixed dividend in perpetuity

IPO: Initial public offering As the company continues to grow, however, there often comes a point where early investors become eager to sell their shares and monetize the profits of their early investments. At the same time, the company itself may need more investment than the small number of private investors can offer. At this point, the company considers an initial public offering, or IPO, transforming it from a private to a public company.

Investing vs speculation Investing is when you hand over your money so that it is put to use for productive projects such as growth or expansion. Investing in a factory, in research and development, in a new business idea – these are all done with the expectation that in the future, the factory, the research, or the startup will be worth more than the original investment. In other words, investing is a rational decision made with an eye to the future. When you invest, your money is intended to be put to work increasing value.

Investing vs speculation Speculation, on the other hand, is akin to gambling. Speculators purchase something with the hope that they can soon sell it at a higher price, but without necessarily understanding – or even caring – about why the price should go up. Sometimes, speculators have a gut feeling, or are trading on rumor, but ultimately they do not concern themselves with the factory, the R&D, or the business plan.

Investing vs speculation The important distinction between investors and speculators is not a normative one, but rather that investors are generally more interested in the processes underlying prices; they are in it for the long haul, while speculators are more interested in the price itself, and with shorter time horizons for making money. 

How to read a stock table Columns 1 & 2: 52-Week High and Low - These are the highest and lowest prices at which a stock has traded over the previous 52 weeks (one year). Column 3: 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. Calculated as annual dividends per share divided by price per share. 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. To get the actual number traded, add "00" to the end of the number listed. Column 9 & 10: Day High and Low - This indicates the price range at which the stock has traded at throughout the day. Column 11: Close - The close is the last trading price recorded when the market closed on the day. If the closing price is up or down more than 5% than the previous day's close, the entire listing for that stock is bold-faced. Column 12: Net Change - This is the dollar value change in the stock price from the previous day's closing price. How to read a stock table

You own part of a company… so What happens now? So, now that you have stock and ownership of a company, what can you do? Not really very much. You will benefit when the price of the stock goes up, or lose if the price goes down. As a part-owner of the company, you are given the right to vote for company's board of directors. Another way you may benefit is if the company pays dividends. Dividends represent a percent of the company's profit, paid to the shareholders.

Risky business Buying stock can be risky, since while the price of the stock may go up, it may also go down. If the company goes bankrupt, then you could potentially lose all the money you invested in the stock. However, that is what investing is all about. Taking risks, in the hope of making money on your investment, with no guarantee that you will make money.

Stock Exchanges US has 3 major Exchanges: New York Stock Exchange (NYSE) National Association of Securities Dealers Automated Quotation System (Nasdaq) American Stock Exchange (AMEX) Canada’s major stock exchange is the Toronto Stock Exchange (TSX) Which happens to be North America’s third largest stock exchange. VIDEO

Best Websites to begin your research Investopedia Strong source for a companies stock history and news Yahoo Finance Investors Guide Has a Stock Research section Google Finance Create a watch list with your learn68 account.