The Stock Market
Public market used for the trading of stocks and bonds. Worldwide rough estimate around 790 trillion dollars in stock markets. Beginnings of the stock market were seen around 12th Century France. One of the most important ways a business makes money.
Main Types of Stock Common Stock • • •
• •
Also known as “preference shares” and “preferreds”. No voting rights. More guaranteed dividends in comparison with common stock, especially in the case of liquidation preferred stock holders would receive dividends first. Looked at as more of a debt, this is seen as being part way between a bond and a stock. Can be switched to common stock.
Also known as “ordinary shares”. Carries voting rights. Owners of this stock have the ability to make changed within the company.
Higher paying dividends. Less stable dividends, lots of ups and downs.
Receive funds last in the occurrence of a liquidation.
Other Types of Stock Some companies make different types of stocks than preferred and common to limit voting abilities and limit control within a company. Ex. One group of stockholders might have a larger weight in voting power and another group could have a much smaller weight in the vote, when more than 1 type they are usually referred to as “Class A” and “Class B”
Advantages of Investing in Stock Possibility of greater returns Accessibility – many stocks available Stocks traded have greater liquidity Investing can reduce the amount of taxes from capital gains Potential losses only what you invested Limited liability of management actions
Disadvantages of Stock Risk Value of stock depends on the financial situation of the company issuing them (the company goes bankrupt, investors lose money) Cost for broker services – reduced income gained from the profits acquired in stock ownership.
Common Stock Advantages Equity financing Stockholders can sell his or her stock to another individual Dollar appreciation of stock value Possibility of increased value from stock splits
Disadvantages Many new investors don’t know where to get the information they need to evaluate potential investments. Secondly, when they find the information, not sure what it means
Preferred Stock Advantages & Disadvantages Advantages: receive cash dividends before common stock holders are pain any dividends Safer investments Disadvantages: lack of growth potential
Market & Inflation The value of shares in a given market are directly related to the value of the company the shares are in, when a company is doing well the shareholders will be doing well and when a company is tanking the owners of the shares in that company are tanking. Inflation effects every aspect of our economy, when the prices or good or services go up everything adjusts with that. For a better economy it is best that inflation and the stock market are alike and stable.
Diversification Definition: Investing in multiple assets to reduce risk For stocks, it is the act of investing in multiple companies with varying industries and sectors Can also mean making different types of investments (bonds, real estate, etc)
Example “Don’t put all your eggs in one basket” If you have $500 in stock A, then sell it all, and put the $500 in stock B, risk is increased. Risk is decreased when $250 is taken from stock A and invested in stock B. So there are 2 separate investments versus only 1.
Ways to diversify Buy stocks of different sized companies (small, medium, large) Large companies may have smaller incremental changes to their stock, while smaller ones may have more drastic changes
Ways to diversify cont’d Choose stocks that have different economic factors These type of stocks will move in different directions depending on current events Example –Oil vs. computing companies
How diverse? Modern Porftolio Theory discusses how investors can maximize financial gain based on market risk States that the optimal diversity is achieved after the 20th stock in one’s portfolio Goes against a common mentality that risk is reduced after every single stock obtained in portfolio. http://www.examiner.com/investinginsanjose/eliminateriskseasily eliminated
Evidence shown that risk is only reduced to a certain point
Zecco.com $4.80 per trade No account minimum Real time quotes Community with message boards
Emotional risk Human decisions Logic and discipline More risk, more dramatic results Fear and greed are main emotions
Tax risk Be aware of tax implications with different types of investments Tax rules are in effect for earnings
Insider Trading
Exchanging of inside (private) information about a company with a shareholder. On public’s radar after Stewart incident. “Misappropriation Theory” is a relatively new law which gets people who steal information themselves from within a company to use in their stock trading in big trouble. Some argue that insider trading should be legal, because it is a “victimless crime”. Punishable by having to return earnings and up to ten years in Prison.
Resources http://dictionary.reference.com/browse/stock+market http://en.wikipedia.org/wiki/Stock_market http://www.stockmarketinvestors.com/stockmarket advicesandtips/stockdiversificationtips.html http://www.usatoday.com/money/perfi/funds/20090106 diversificationstockfundlosses_N.htm http://www.investopedia.com/articles/01/051601.asp