Stocks 101: Investment Basics

What Are Stocks?

Stocks essentially constitute ownership in a company or corporation. The amount of stock shares that an individual holds in a company determine the amount of investment return (or, in some cases, loss) that said individual can expect s the company grows or shrinks and the price per share of company stock rises or falls. This article will focus on the two basic types of stock, how to buy stock, and other general stock-related information. Please keep in mind that the content of this article is in no way intended to substitute for advice from your certified financial advisor, who is the best person to advise you on your individual stock and investment options.

Types of Stock There are two basic types of stock: common stock, and preferred stock.

• Common Stock: Most basic type of stock issued by a corporation. This type of stock represents ownership in a fraction of the company, and is more directly influenced by the failures and successes of the company, making common stock more of a gamble. With common stock, there is also a higher chance of making a profit, and common stock owners are issued their dividends or profits after the preferred stock holders.

• Preferred Stock: In addition to receiving dividends first, preferred stock holders are paid back the money that they have invested in the company before the common stock holders in the event that the company goes out of business and liquidates its assets. One drawback to preferred stock is that they cannot benefit as much from company profits because they are only paid a fixed dividend payment. There are several different classes of preferred stock, which vary in structure from company to company, so it is best to research the individual company(s) that are you are interested in investing in before deciding which types of stock to purchase.

How To Evaluate Stock

When searching for the best stocks, it is important to choose a company with strong sales growth to support its earnings growth. Think of sales growth as the foundation under a house: if it is loose, it’s not as stable as one with all the structural elements in place. When a company increases its sales, it’s sending a message that its business is drawing larger demand and is structurally sound and prepared to expand and generate the earnings capable of boosting its stock price.

Demand is driven by a number of factors, including larger numbers of customers, customers increasing their purchase volume, introduction of new products, expansion into new markets and the improvement of existing products. The top-performing companies show consistent double- or triple-digit sales growth. It’s even better when the percentage growth rate increases quarter after quarter. Such acceleration is the hallmark of quality growth companies because it reflects a well-managed organization.

How To Purchase Stock

Shares of stock are typically purchased through a stock broker on an individual basis, and some companies distribute stock individually to shareholders. When selecting a brokerage, individuals can chose between a full service brokerage firm or a discount brokerage to execute your trades. When you use a brokerage, as opposed to purchasing or receiving stock directly from a company (in most cases) you have the option of buying on a margin, a practice which gives you more buying power on your returns, but also increases your risk. Be sure to discuss all options with your financial advisor before proceeding, because most brokerage firms have a heavily-vested interest in encouraging their investors to use margin.

Stock Indexes

It is important for investors, as well as potential investors, to realize that while stock indexes are useful for benchmarking portfolios, generalizing investor experience, and determining the market return used in the Capital Asset Pricing Model, a stock price index by itself does not represent an average return to shareholders. A stock price index by definition considers only the prices of underlying stocks and the dividends paid, and dividends can account for a large percentage of the total investment return. The stock index is a helpful and essential, but not the only tool, for determining stock value. The following is a list of some of the more commonly used indexes.

Dow Jones Industrial Average:

The Dow Jones Industrial Average is the most widely quoted stock index, and has been in existence since 1884, when the then Dow Jones & Co first published the index of eleven companies in the Customer’s Afternoon Letter, a newspaper that later became known as the Wall Street Journal.

The Nasdaq Composite Index:

The Nasdaq Composite Index is a market capitalization weighted index created in 1984 by the Frank Russell Company, which covers 3000 companies, making the Nasdaq a slightly smaller index than the Dow.

The S&P:

There are two types of Standard and Poor Indexes: The S&P 100 and the S&P 500. The S&P 100 is a market capitalization weighted index of large –cap companies and is more commonly known by its ticker symbol OEX. The S$P 500 is also a market capitalization weighted index of large cap companies, but more commonly indexes stocks from the industrial, utility, and transportation industries.

The Wilshire 5000:

The Wilshire 5000 was created the Wilshire Associates in 1974 and is the broadest exchange currently in operation, covering virtually every US traded stock.

Where To Turn For Further Stock and Stock Market Information And Advice

While there are many websites dedicated to providing information about stocks and stock related tips, the best place to receive your information, whether via the internet or in person, is from your trusted financial planning firm. Your personal certified financial planner can work with you on an individual basis to help you make the kind of smart investment choices necessary for a secure and profitable portfolio.