Stock Investing Basics Important Terminology Related to Stock Investing

Stock  Stock represents ownership in a corporation.  It also represents a proportional share in the assets and profits of the issuing corporation.

Corporations  Corporations are legal entities owned by individual stockholders.  20% of all businesses in the United States are classified as corporations.  90% of all products sold and services provided in the United States come from corporations.  The two types of corporations are publicly traded and privately held.

Why do Corporations Issue Stock?  To raise financial capital that the company can use to expand its business operations, update equipment, and conduct research and development.  All of these efforts are designed to improve the corporation’s profitability.

Public Corporations  These are also referred to as publicly traded or publicly held corporations.  These are companies that sell their stock to the general public.  McDonald’s, Wal-Mart, Home Depot, and Coca-Cola are all examples of publicly traded corporations.

Private Corporations  These are also referred to as privately held or closely held corporations.  These are corporations that issue stock but do not sell it to the general public.  Chick-fil-A is an example of such a company.

Why do People Invest in Stocks?  To make a profit! Historically, stocks have returned around 10%.  Profits are made from stock in two ways 1.Dividends 2.Appreciation in value from the time of purchase until the time of sale (capital gains).

Common Stock Common Stock Characteristics:  The shareholder (person that owns the stock) has voting privileges on company matters.  The shareholder may receive dividends (profits of the corporation that are distributed to shareholders).  There is a greater potential for growth (appreciation in value) with common stock.

Preferred Stock Preferred Stock Characteristics:  The shareholder is guaranteed to be paid a dividend before common stock shareholders.  The shareholder has virtually no voting privileges in company matters.  A preferred share of stock is assigned a dollar value that is printed on the stock certificate (par value).  There is much less fluctuation in the price of preferred stocks compared to common stocks.  Preferred stock is a much more conservative investment than common stock.

Market Capitalization   This is the total number of stocks issued by a corporation multiplied by the current market price of the stock.   We are going to discuss three types of market capitalization:   Large-Cap   Mid-Cap   Small-Cap

Large-Cap Stocks   These are the stocks of corporations that have market capitalizations in excess of 10 billion dollars.   Some examples of large-cap stocks include: Exxon-Mobil (426 Billion), Microsoft (227 Billion), Wal-Mart (197 Billion), and General Electric (228 Billion).

Mid-Cap Stocks   These are the stocks of corporations that have market capitalizations of between 2 billion and 10 billion dollars.   Some examples of mid-cap stocks include: Family Dollar (6 billion) and VeriSign (6 billion)

Small-Cap Stocks   These are the stocks of corporations that have market capitalizations of between 300 million and 2 billion dollars.   Some examples of small-cap stocks include: The Cheesecake Factory (1.8 billion) and Ann Taylor Stores (1.4 billion).

Stock Exchanges A stock exchange is where shares of stock are bought and sold. Some examples of stock exchanges include the New York Stock Exchange (NYSE) and the NASDAQ. These are also sometimes referred to as securities exchanges.

NYSE  The New York Stock Exchange is one of the world’s largest and most well known exchanges.  More than 3000 corporations are listed on the NYSE.  The NYSE uses a combination of human floor traders and computerized trading.  The NYSE is open between 9:30 A.M.-4:00 P.M. (EST)  Some of the world’s largest and most well known companies are traded on the NYSE.  Some examples include: Coca-Cola, Wal-Mart, Exxon- Mobil, General Electric, and McDonald’s.

NASDAQ   NASDAQ stands for the National Association of Securities Dealers Automated Quotation System.   This is a completely computerized stock exchange.   More than 4000 corporations are listed on the NASDAQ.   The NASDAQ was started in   Many high tech companies are listed and traded on the NASDAQ.   Some examples include: Microsoft, Intel, Dell, Amazon.com, Google, and Apple.

Brokerage Firms  A brokerage firm is a company that conducts securities trading (the buying and selling of stocks, bonds, mutual funds, etc…), investment research, analysis, and advisory services for its clients.  We are going to talk about the differences between full-service and discount brokerage firms.

Full-Service Brokerage Firms  Full-service brokerage firms provide the most personalized services (research, advice, retirement planning, tax tips, etc…)  They also charge the highest fees and commissions.  Typically, full-service brokerages are best for individuals that do not have the time, level of comfort, or expertise to make their own investment decisions.  Some examples of full-service brokerage firms include: Merrill Lynch and Edward Jones.

Discount Brokerage Firms   Discount brokerage firms carry out buy and sell orders for their clients but provide little or no investment advice.   The fees and commissions charged by discount brokerage firms are much lower than those charged by full-service firms.   Discount brokerage firms are best for individuals that have the ability, level of comfort, and expertise to conduct their own research and make their own investment decisions.   Some examples of discount brokerage firms include: E- Trade and ShareBuilder.

Brokerage Firms (Continued)   Charles Schwab and TD Ameritrade are examples of brokerage firms that offer both full and discount services to their clients.   Fidelity and Vanguard are two of the largest mutual fund companies that also provide brokerage services to their clients.

Stock Performance Indicators  Some common indicators of stock market performance include the:  Dow Jones Industrial Average  S&P 500  NASDAQ

Dow Jones Industrial Average  The Dow Jones Industrial Average tracks the stocks of 30 of the largest and most widely held companies in the United States.  The DJIA is calculated by adding the sum stock values of the 30 companies listed in the index and dividing the sum by an established divisor.  The current divisor is  Because the divisor is less than one it actually serves as a multiplier.

S&P 500  This is a stock index that contains 500 large companies.  Each of these companies trade on either the New York Stock Exchange (NYSE) or on the National Association of Securities Dealers Automated Quotation System (NASDAQ)  It is the second most watched US index after the Dow Jones Industrial Average. However, many investors feel that the S&P 500 is a better indicator of the overall stock market because it contains more companies.  Each of the 30 companies listed in the Dow Jones Industrial Average are also listed in the S&P 500 Index.

Types of Stock Investments  We are going to examine the following types of stocks:  Blue-Chip Stocks  Income Stocks  Growth Stocks  Cyclical Stocks  Defensive Stocks  The stocks of some companies can fit into several of these categories.

Blue-Chip Stocks   These are the stocks of the most well established and financially sound companies.   All 30 of the stocks that make up the DJIA are blue-chips.

Income Stocks   These are the stocks of companies that pay regular and steadily increasing dividends.   These are typically conservative stock investments that may not appreciate (or decline) as much in value as other types of stocks.   Exxon-Mobil and Proctor & Gamble are examples of income stocks.

Growth Stocks   These are the stocks of companies whose earnings are expected to grow at an above average rate.   Growth stock companies often do not pay dividends. They instead invest the profits back into the company in the hopes of becoming more profitable.   Google and Amazon.com are examples of growth stocks.

Cyclical Stocks   These are stocks that appreciate in value quickly when economic growth is strong and fall rapidly when economic growth is declining.   Alcoa, Caterpillar, and Ford are examples of cyclical stocks.

Defensive Stocks   These are stocks that remain stable during declines in the economy.   Blue-chip and income stocks like Exxon- Mobil and Proctor & Gamble are examples of defensive stocks.