Learn What The Rich Know: Pillar 5.3 - The ABCs of Investing

PAPER SECURITIES

STOCKS
A stock is a share of ownership in a company. When a private business needs money to operate, develop new products, or expand, its management may decide to issue stock for individual public investors to buy. This could be called a private placement or going public. A company goes public in an initial public offering (IPO).

“An investor’s most important tool is information. Without good, solid information, stock investing becomes just guesswork.”  

Types of stock
Preferred stock is given preference over common stock if a company liquidates its assets. Income to shareholders is based on fixed dividends and redemption dates rather than corporate earnings. Convertible preferred stock gives the owner the option to convert preferred into common stock.

Common stock is the choice of most investors. Owners are entitled to vote on the selection of directors and other important corporate concerns.




Here are just a few of the categories of stock:

• Blue chip. Stocks of large companies with established records of profitability and dividend payment. Blue chips tend to be more expensive than other stocks, but their value is also considered more stable. 

• Small cap. Stocks of smaller companies. “Cap” refers to capitalization, which is the price of a share multiplied by the total number of shares on the market. While these stocks may fluctuate significantly in the short term, over the long term small caps as a whole have outperformed every other type of stock. 

• Growth. Stocks of companies with earnings that have risen faster than average. These companies tend to reinvest profits in the business to maintain a competitive edge. Investors hope that, over the long term, prices will rise as the company grows. In the short term, though, price swings can be more dramatic than with stocks that pay dividends. 

• Income. Stocks that pay fairly reliable quarterly dividends. Utilities, such as power companies, are the most commonly held income stocks. Income stocks tend to be relatively stable because of the high level of income they produce, yet a more competitive climate or overall market decline can cause drops in prices.

• Speculative. Stocks in companies that have no proven track record or dividend history. Often called penny stocks, they sell for $5 or less and come with a high risk. 

• Foreign. The price of foreign stock, which is affected by all the market concerns that drive the prices of domestic stock, is also vulnerable to currency exchange rates, political turmoil, different laws and regulatory oversights, and any number of other issues arising in individual countries. 

“As an outside stockholder, you have no control over the management of the company in which you own stock.” 

Pros and cons of investing in stocks. Should you invest in stocks? Unless you possess the skills of a qualified investor and understand either technical or fundamental methods of analysis, you should exercise caution.

Stock indexes are economic indicators of overall stock market performance. By tracking the price changes of a specific selection of securities, an index provides a benchmark for investors to evaluate the performance of an individual stock.

“It is not possible to predict the market, but it is important that we be prepared for whichever direction it decides to go.”