TYPES OF STOCK
When you buy shares of ownership in a corporation, you become a stockholder. If a business is profitable, it may pay out part of the profits in cash to the stockholders. These payments are dividends . The opportunity to earn a high rate of return attracts people to invest in stocks. Keep in mind that the risk of losing money on a stock investment also exists.
Before it can pay any dividends to stockholders, a corporation must pay bondholders the rate of interest promised to them. Sometimes there is not enough money left to pay dividends. If the corporation decides to put the money it earns toward business expansion, stockholders receive no dividends. If a corporation goes out of business, a stockholder may get little or nothing back from the investment.
Preferred StockThe two main classes of stock issued by corporations are preferred stock and common stock. Preferred stock has priority over common stock in the payment of dividends. The dividends paid to preferred stockholders are usually limited to a set rate. Investing in preferred stock is less risky than common stock, but preferred stockholders generally have no voting rights.
Common StockThe second main class of stock is common stock. Common stock represents general ownership in a corporation and a right to share in its profits. Common stock has no stated dividend rate. As part owners of the corporation, common stockholders are invited to the annual meeting of the corporation. They are entitled to one vote per share of common stock owned.
Common stockholders receive dividends only after preferred stockholders are paid their dividends. Yet, if the profits of a company are large, the common stockholders may receive higher dividends than preferred stockholders. Suppose that a company has issued $100,000 worth of common stock and $100,000 worth of preferred stock with a dividend rate of 6 percent. The company earns a profit of $20,000 and pays all the profit out as dividends. Preferred stockholders would be paid $6,000 in dividends, $100,000 × 0.06. The remaining $14,000 ($20,000 – $6,000) would be available to pay dividends to the common stockholders. The common stockholders would earn a return of 14 percent.
STOCK TRANSACTIONSEach day, people buy and sell billions of shares of stock. Buying a stock that is right for you is an important decision.
Using a StockbrokerA licensed specialist in the buying and selling of stocks and bonds is a stockbroker . Through brokers, stockholders state the price at which they are willing to sell their shares. Interested buyers tell brokers what they would be willing to pay for those shares. The brokers then work out a price that is acceptable to both buyers and sellers. For their services, brokers charge a fee called a commission.
Two types of brokers are common. A full-service broker provides information about securities you may want to buy. Full-service brokers work for brokerage houses with large research staffs.
In contrast, a discount broker just places orders and offers limited research and other services. They charge lower commissions than full-service brokers. Investors who do their own research can save money by using a discount broker.
Online InvestingNearly all brokers provide online services. These services allow investors to access account information as well as buy and sell securities. When investing online, you are serving as your own financial planner.
These transactions are usually less expensive and more convenient than using a financial planner or broker. There are also disadvantages to investing online. Inexperience in making investment trading decisions can result in a large financial loss. Many online investors buy or sell stocks too quickly because making trades is only a click away.
Stock ExchangesBrokers work through a stock exchange , which is a business organization that accommodates the buying and selling of securities. The best-known stock exchange is the New York Stock Exchange in New York City. The American Stock Exchange is also in New York City. Regional stock exchanges operate in Boston, Chicago, Philadelphia, and San Francisco. More than 170 stock exchanges are in operation around the world.
Usually, stocks of smaller companies are not traded on a stock exchange. The over-the-counter (OTC) market is a network where securities transactions occur using telephones and computers rather than on an exchange. The OTC market in the United States is the NASDAQ, which stands for the National Association of Security Dealers Automated Quotations. Today, the NASDAQ includes many large companies.
Changing Stock ValuesThe market value of a stock is the price at which a share of stock can be bought and sold in the stock market. The market value indicates the current value of a share of stock.
The prices at which stocks are being bought and sold are available through stock market listings in newspapers and online. Figure 19-4 shows a stock market price report.
The market value can change rapidly. If the business is doing well, the market value is likely to go up. If the business has a poor record, the market value usually goes down. The market value also may be affected by current economic conditions as well as national and global politics.
Another measurement of investment values is a stock index . These indicators of stock values are commonly reported on websites, television, radio, and in newspapers. The Dow Jones Industrial Average (DJIA) includes 30 of the largest U.S. companies. Another commonly reported stock index is the Standard and Poor's (S&P) 500, which is based on stock values of 500 major companies.
When you buy shares of ownership in a corporation, you become a stockholder. If a business is profitable, it may pay out part of the profits in cash to the stockholders. These payments are dividends . The opportunity to earn a high rate of return attracts people to invest in stocks. Keep in mind that the risk of losing money on a stock investment also exists.
Before it can pay any dividends to stockholders, a corporation must pay bondholders the rate of interest promised to them. Sometimes there is not enough money left to pay dividends. If the corporation decides to put the money it earns toward business expansion, stockholders receive no dividends. If a corporation goes out of business, a stockholder may get little or nothing back from the investment.
Preferred StockThe two main classes of stock issued by corporations are preferred stock and common stock. Preferred stock has priority over common stock in the payment of dividends. The dividends paid to preferred stockholders are usually limited to a set rate. Investing in preferred stock is less risky than common stock, but preferred stockholders generally have no voting rights.
Common StockThe second main class of stock is common stock. Common stock represents general ownership in a corporation and a right to share in its profits. Common stock has no stated dividend rate. As part owners of the corporation, common stockholders are invited to the annual meeting of the corporation. They are entitled to one vote per share of common stock owned.
Common stockholders receive dividends only after preferred stockholders are paid their dividends. Yet, if the profits of a company are large, the common stockholders may receive higher dividends than preferred stockholders. Suppose that a company has issued $100,000 worth of common stock and $100,000 worth of preferred stock with a dividend rate of 6 percent. The company earns a profit of $20,000 and pays all the profit out as dividends. Preferred stockholders would be paid $6,000 in dividends, $100,000 × 0.06. The remaining $14,000 ($20,000 – $6,000) would be available to pay dividends to the common stockholders. The common stockholders would earn a return of 14 percent.
STOCK TRANSACTIONSEach day, people buy and sell billions of shares of stock. Buying a stock that is right for you is an important decision.
Using a StockbrokerA licensed specialist in the buying and selling of stocks and bonds is a stockbroker . Through brokers, stockholders state the price at which they are willing to sell their shares. Interested buyers tell brokers what they would be willing to pay for those shares. The brokers then work out a price that is acceptable to both buyers and sellers. For their services, brokers charge a fee called a commission.
Two types of brokers are common. A full-service broker provides information about securities you may want to buy. Full-service brokers work for brokerage houses with large research staffs.
In contrast, a discount broker just places orders and offers limited research and other services. They charge lower commissions than full-service brokers. Investors who do their own research can save money by using a discount broker.
Online InvestingNearly all brokers provide online services. These services allow investors to access account information as well as buy and sell securities. When investing online, you are serving as your own financial planner.
These transactions are usually less expensive and more convenient than using a financial planner or broker. There are also disadvantages to investing online. Inexperience in making investment trading decisions can result in a large financial loss. Many online investors buy or sell stocks too quickly because making trades is only a click away.
Stock ExchangesBrokers work through a stock exchange , which is a business organization that accommodates the buying and selling of securities. The best-known stock exchange is the New York Stock Exchange in New York City. The American Stock Exchange is also in New York City. Regional stock exchanges operate in Boston, Chicago, Philadelphia, and San Francisco. More than 170 stock exchanges are in operation around the world.
Usually, stocks of smaller companies are not traded on a stock exchange. The over-the-counter (OTC) market is a network where securities transactions occur using telephones and computers rather than on an exchange. The OTC market in the United States is the NASDAQ, which stands for the National Association of Security Dealers Automated Quotations. Today, the NASDAQ includes many large companies.
Changing Stock ValuesThe market value of a stock is the price at which a share of stock can be bought and sold in the stock market. The market value indicates the current value of a share of stock.
The prices at which stocks are being bought and sold are available through stock market listings in newspapers and online. Figure 19-4 shows a stock market price report.
The market value can change rapidly. If the business is doing well, the market value is likely to go up. If the business has a poor record, the market value usually goes down. The market value also may be affected by current economic conditions as well as national and global politics.
Another measurement of investment values is a stock index . These indicators of stock values are commonly reported on websites, television, radio, and in newspapers. The Dow Jones Industrial Average (DJIA) includes 30 of the largest U.S. companies. Another commonly reported stock index is the Standard and Poor's (S&P) 500, which is based on stock values of 500 major companies.
Stock Information SourcesWhen choosing stocks, you should learn about the company. Several sources are available to assist you. These include Moody's Handbook of Common Stocks, Value Line, and Standard and Poor's Encyclopedia of Stocks. Publications like these provide data about net worth, debt, sales revenue, profits, dividend history, and the future prospects of companies. Many websites are also available to provide valuable information on companies.
The U.S. Securities and Exchange Commission (SEC) oversees the financial markets. It requires all companies that issue publicly traded securities to electronically file detailed reports. You can access these reports at the SEC website.
Economic FactorsMany economic conditions affect stock prices. Awareness of these factors will help you make better choices about stock investments. You should consider the following economic factors.
Inflation Higher prices can result in lower spending by consumers, reducing company profits.
- Has the company been profitable over a period of years?
- Have the company's managers made good business decisions?
- Does the company have growth potential in coming years?
- Does the company have an unusually large amount of debt?
- How does the company compare with others in its industry?
Suppose a company is paying a quarterly dividend of $0.60 a share. The total dividend for the year would be $2.40. If the stock were selling for $40 a share, the current yield (return) would be calculated as
View PDF
The price of a stock should also be considered. Many investors look at the stock's price-earnings (P/E) ratio , which is the relationship between a stock's selling price and its earnings per share. The P/E ratio gives you an indication of whether the stock is priced high or low in relation to its earnings per share.