The Stock Market

Dividend Paying Stocks: What I've Learned

2007-11-19T05:20:00.000-08:00

As stated before, dividends are paid out of a company's earnings. To pay them, the company must first have the money. After that, it's up to the company's board of directors to decide if, when and how much dividend is to be paid. More often than not, dividends are paid in cash-although they may be paid in the form of additional stock. And, they are usually paid on a quarterly basis, or once every three months.

THE DIVIDEND ENVIRONMENT ON WALL STREET

Dividend yields have been falling for the past ten years on Wall Street. One reason for the lower dividend yields revolves around the way today's corporate executives are managing their business.

Years ago, maintaining-if not increasing-a company's dividend was very much in vague. That strategy was one way a company could tell its shareholders that it was prospering and doing well. Today management doesn't necessarily talk that same language. Instead, many firms have decided to buy back shares of their company's outstanding stock rather than pay a dividend or increase what they are paying.

While stock buybacks often result in the per share price of the stock rising, it doesn't allow for any cash to flow to shareholders-unless, of course, the shareholders sell some of the shares they own, or they own shares of the company's preferred stock. In which case the dividends must be paid.

Where to get cash: If an individual absolutely needs income, they should consider purchasing preferred stock rather than common stock. The big advantage is that a company must pay dividends to its preferred shareholders before it pays its common stock shareholders. Another plus is that the dividend on preferred stocks won't fluctuate as on common stock, because the dividend is fixed and investors know how much their preferred stock investment will pay them. On the other hand, don't look for dividend increases on preferred stock.

TAXES AND DIVIDENDS

If a company pays its dividend in stock, depending upon the number of shares a person owns, the dividend may come in full or fractional shares. Don't be concerned about those fractional shares; over time, fractional shares add up to full ones and will increase the total number of shares a person owns of the company.

Another benefit to receiving a company's dividend payment in the form of stock rather than cash is taxes. Stock dividends aren't taxed when you receive them. The only time you'll ever pay taxes on any shares of stock you own-dividend-paying or otherwise-is when you sell those shares of stock at a higher price than what your cost basis on that stock is. (A cost basis is the per-share price paid for a security that includes commission costs). That means you control when a capital gains tax-which you pay when you sell your stock for more than you paid for it-is paid.

However, when a company decides to pay its dividends in cash you have to pay a tax on those dividends the year you receive them.

FOUR TERMS TO REMEMBER

Here are four terms investors of dividend-paying stocks must be familiar with:

Declaration Date: This is the day that the company's board of directors announces to the world that A) A corporate dividend is to be paid, B) How much the dividend will be, C) The payable date, and D)The record date.
Payable Date: This is the date that the company's dividends will be paid to all eligible shareholders.
Record Date: To be eligible to receive a company's dividend, shareholders must own the stock by this date. For example, if an individual bought shares of XYZ corporation on May 16, and the company is paying it's dividend on May 31 to those with a record date of May 12, that person must have purchased shares of that stock on or before May 12. Buying on May 16 means they missed the current dividend payout.
Ex-Dividend Date: The ex-dividend date is the day on which the dividend is actually deducted from the price of stock. Anyone buying stock on or after this date will not be eligible to receive a dividend payout from the company during this quarter. Ex-dividend dates aren't set by the company itself but by the National Association of Securities Dealers. However, remember that all is not lost, buying shares of stock on its ex-dividend date doesn't mean a person will miss out receiving a dividend from a company forever; it just means that they won't receive one that's been declared for the quarter.

UTILITY STOCKS AS DIVIDEND PAYERS

One popular type of stock is utility stock. Liked by investors because they provide a steady income stream, loved by brokers selling them because they can generally satisfy their clients' needs, utility stocks have often formed the foundation upon which many stock portfolios are built.

Today, however, utility stocks aren't what they used to be. In the 1990s, a utility stock isn't necessarily just a plain old-gas, electric, or telephone company play. Often these companies are large conglomerates that own all sorts of other businesses, companies, or have a hand in the telecommunications industry. Consequently, assuming that all utility stocks are alike, or that the management of each is as dedicated to increasing dividends as many once were is no longer appropriate.

However, that's not saying these stocks aren't good investments. These companies-like others- need to be researched and, like Oldsmobile, today's utility stocks aren't necessarily the ones they were years ago.

CALCULATING DIVIDEND YIELD

Figuring out a company's dividend yield is easy. All it takes is knowing the per share price paid for the stock, how much money in dollars and cents the dividend is, and the ability to divide.

For example, if Make Me Rich Corporation is selling for $50 a share, and the board of directors decides it's going to pay is common stock shareholders $2 a share in dividends, 2 divided by 50 equals .04. So, the stock is paying a dividend yield price of 4 percent.

DIVIDEND REINVESTMENT PLANS

A dividend reinvestment plan allows participating shareholders to purchase more shares of the company's stock with the dividends they are paid. These plans are one of the niftiest ways to build a stock portfolio and not invest more money than originally laid out for a persons initial shares of dividend-paying stocks. These plans are referred to as DRIPs or DRPs, and literally hundreds of companies offer them to their shareholders.

Depending on the company, or the way you decide to participate in a DRIP, it can take anywhere from the cost of one share of a company's stock to $10, $50, $100, or $1,000 to begin this investment plan.

As for the kind of money that can be made via DRIPs, according to Standard & Poor's Dictionary of Dividend Investment Plans, if a individual had invested $1,000 in Coca-Cola in 1985 reinvesting the dividends from that stock all along the way, at the end of 1995 the investment would be worth $12,680. That's an annual return of 29 percent over a 10-year period. On the other hand, a $1,000 investment into the footwear retailer Brown Group and reinvesting in dividends all along, would only be worth $745 at the end of the year 1995. That's an annual rate of return of -3 percent. As those two examples show, there's a risk in DRIP investing too.

Three easy ways to begin investing in a company's dividend reinvestment plan are:

Buy shares of a dividend-paying company offering a reinvestment plan as you would any other stock through your broker. Then, tell your broker you'd like to have that company's dividends reinvested, or paid to you in the form of additional shares of stock.
Join the National Association of Investors Corporation, (NAIC). Once all membership dues are paid, starting a DRIP program can begin with as little as one share of a company's stock.
Or, to research the DRIP arena on your own, look for the Standard & Poor's Dictionary of Dividend Reinvestment Plans in your library's reference section; ask your broker is his or her firm has a list showing the companies that offer dividend reinvestment plans; or contact the American Association of Individual Investors, (AAII). This Chicago-based non-profit organization has plenty of information available on DRIPs.

Works Cited:
Vujovich, Dian 10 Minute Guide to the Stock Market New York, United States of America: Murtha, 1997

International Stock: What I've Learned

2007-11-18T15:24:00.000-08:00

There is economic development happening across the globe. There are emerging markets in China and India. Then there are stable global markets in Japan, United Kingdom and Canada. With it comes the ability to invest in these markets. However, just as in our own market, there are risks-and we should add that there are added risks to investing outside the country.

WHAT TO EXPECT

The reason anyone invests is to make money, whether those investments are in securities such as stocks, or commodities, like grain or precious metals. The reason anyone invests outside the U.S. is to make money. But to make money in foreign stocks on foreign stock markets takes extra skill.

In the securities world, there is no stock market as precise or regulated as the one in the United States. Most countries don't have a SEC. Some countries don't even have one centralized place to trade securities, and stocks are often traded in sections of stores or on the streets as securities once were here. Nor are accounting systems centralized all over the globe. Neither is the value of money. Or executive points of view. Or business ethics, employee work conditions, or product-quality controls. All of which means that there can be far more risk to investing in a company based outside the U.S. than in one here at home.

On the other hand, there are international companies such as Nestle whose companies are well-respected and whose companies many consider blue chips.

While it's safe to say that international trading is becoming more and more popular and the global investing world is getting smaller and smaller, that doesn't mean all markets perform tandem with one another.

So why bother to invest outside? The answer is simple: Because year-in and year-out, the U.S. markets don't outperform other markets. So, for anyone who sees the world as full of opportunities and wants to create a diversifies stock portfolio, investing abroad makes logical sense.

HOW TO INVEST INTERNATIONALLY

There are four popular ways to invest in the securities of other countries. The first is to buy shares of a stock that are listed and trade on the U.S. markets, like Grand Metropolitan, the U.K. company.

Another way is the purchase ADRs-American Depository Receipts, or receipts for shares of foreign countries. Owning them gives stockholders the right to receive any company dividends, they don't just receive the stock certificates themselves. There are thousands of ADRs on the market, one of which is Coles Myer Ltd., the largest retailer in Australia.

A third way to invest internationally is to purchase shares of U.S. multinational companies, like Exxon and Coca-Cola, or hundreds of other corporations that have a business presence in other parts of the world.

The fourth way is to invest in global and/or international mutual funds. There are nearly 900 different global and international stock funds for investors to choose from within the mutual fund arena. Some invest into specific regions of the world, like Latin America or Japan; others invest internationally in small-cap funds; still others in the stocks traded on the emerging markets.

RISKS OF INTERNATIONAL INVESTING

There are five main risk factors every investor has to consider before investing abroad:

Political
Social
Economic
Language
Currency

Mexico is a prime example of a country that offers investors a world of investing opportunity and at the same time illustrates the risks of international investing.

In the early 1990s, Mexico was enjoying an economic rebound, with inflation under control, stocks doing well, and a government whose president was widely respected. Then, in what seemed like an instant, what is referred to now as the "Tequila Effect" happened, turning all that was economically rosy in Mexico upside-down. Stock prices tumbled, government officials changed, inflation picked up, and the value of the peso-which had stabilized-jumped all over.

Political changes, social unrest, changes in currency values, and natural disasters can all damage a country's stock market performance. Language can also be a problem for the international investor, particularly if they can't speak, read, or write in the language of the country whose companies they want to invest in.

So there's plenty to worry about if you're conservative by nature and are considering investing outside the United States. Then again, even the most conservative investor can't completely overlook the numerous investment opportunities that exist around the world. That's why many investors who want to own stocks of international companies but don't feel they have the expertise to pick those stocks have opted for investing in global and international mutual funds. That way they can let the portfolio manager of the fund do the stock picking.

Works Cited:
Vujovich, Dian 10 Minute Guide to the Stock Market New York, United States of America: Murtha, 1997

Stock Personalities: What I've Learned

2007-11-17T11:20:00.000-08:00

When it comes to understanding the entire universe of stocks, one must think about them as having personalities. And often, that personality depends upon the personality of the individual investor-their investment objectives, whether their investing for income or growth, and the risks they are willing to take.

GROWTH STOCK

If anything whets the appetite of investors, it's the prospect that the per-share price of a stock is going to not just move ahead slowly but surely, but soar. Growth stocks hold that possibility because they typically represent new and expanding companies whose market values can appreciate quickly.

Depending on the company, growth stocks usually don't pay dividends since most of the company's profits get plowed back into it to further its growth and development. If they do pay dividends, they are often small. Growth stocks usually sell at high price-earnings multiples, probably don't have long-term well-established performance histories, and might be considered to be risky investments. But what makes them attractive investments isn't necessarily just their price-earnings multiples but how fast earnings of a company are growing.

Price-Earnings Ratio (P/E): If your looking for a quick way to figure out how much you are paying for a company's stock in relationship to its earnings, look at its price-earnings multiple, or P/E ratio, as it's commonly referred to. A price-earnings ratio is figured by dividing the price per share of a stock by its earnings per share. So, if XYZ corporation's price per share is $20, and its earnings per share $2, the P/E is 10 (20 divided by 2). Similarly, if ABC Company's price per share is $20 and its earnings per share is $1 then its P/E would be 20. A general rule of thumb is, the higher the stocks P/E, the risker-or more aggressive-an investment it is. So, as per example, ABC would be considered more a aggressive investment based upon the company's P/E ratio.

UNDERVALUED STOCK

If a person is a bargain hunter in the shopping world, they will probably take a shine to undervalued stocks in the securities world.

Undervalued stocks, often called value stocks, have typically been overlooked by money managers and investors. They may have fallen out of favor with investors because of current trends in the market, but nonetheless may be stocks from secure, well-established companies with solid balance sheets.

One key to finding an undervalued stock is to look at past performance. If the stock of a well-established company has a history of performing well in the past, steadily increasing its dividend if it pays one, makes a good product that continues to sell, and has a solid financial picture, the stock could be a great buy for the value-conscious investor. On the other hand, and undervalued stock could be undervalued for another reason-perhaps there are management problems and as a result the company has fallen on difficult times.

Unlike growth stocks that typically represent new companies, finding undervalued stocks to invest in can be a conservative way to invest in established companies that others have over-looked and that could perform handsomely in the future. Finding the value, however, begins with doing homework.

What is Growth and what is Value?: The basic difference between growth and value investing, or investing in undervalued stocks, is growth investors believe that, if a company is selling its product and making more money year after year, no matter how the P/E reads, the price will appreciate, (which means it will go up in value). Value investor on the other hand look almost solely at a company's price-earnings ratio. Buying stocks with low price-earnings ratios lowers the downside risk, unless the earnings of the company fall apart. However, they both have one thing in common, they both have risks and they both come with no guaranteed results.

BLUE CHIP STOCK

They big guys on Wall Street are the blue chip stocks. They make up the 30 stocks in the DJIA. They are the companies whose names are instantly recognizable; MacDonald's, Coca-Cola, and Johnson & Johnson.

Blue chip stocks represent stable, profitable, well-known companies that have a solid history of steady revenue growth and dividend payouts.

Investors who like the blue chips aren't looking for pizzazz. They're looking for quality. They are also looking for companies whose per-share prices may be relatively high, but some stable companies they can feel secure about, and whose price appreciation is likely to be steady no matter what market conditions are. Provided, of course, the company is still selling solid wares, staying out of court, and generally performing up to its blue chip name.

SMALL COMPANY STOCK

Small company stocks are just as their name implies: The stocks of companies whose market capitalization is small-usually less than $500 million up to $1 billion, depending on who's doing the defining. Here again, there is no clear-cut, Wall Street definition of how much capital differentiates a small-cap company, another calls a mid-cap one. What one person calls a small-cap company, another calls a mid-cap; it's important to remember small-cap stocks are more growth-oriented, and considered more aggressive investments than blue chip or growth stocks. With any luck at all, however, small-cap stocks can grow into large-cap stocks and eventually blue chips. Microsoft is an example of that.

So, while the performance of small-cap stocks is historically more volatile, this type of stock can also be more financially rewarding.

Market Capitalization: Market capitalization is a company's overall dollar worth, determined by multiplying the stock price by the number of shares outstanding. For instance, a stock worth 5 million shares outstanding selling at $20 per share would have a market capitalization of $100 million, (5 million times $20).

CYCLICAL STOCK

Housing, automobile, and paper stocks are examples of cyclical stocks. They are called cyclical because their earnings and stock prices have a tendency to rise when the economy is strong and fall when the economy is falling or in a recession.

Cyclical stock also refers to companies that make durable good such as paper products or cars.

NONCYCLICAL STOCK

Tobacco, drug, and food companies are considered noncyclical because the demand for their products remains constant no matter what's happening to the market or the country's economy.

Noncyclical stocks are often large blue-chip companies, which is why many money pros considered them a staple when creating long-term stock portfolios; they have a tendency to be more cycle-proof than other stocks.

MULTINATIONAL STOCK

Investing outside of the U.S. is not only being talked about a lot but is becoming a very popular practice for some investors.

U.S. multinational stocks-if a investor is reluctant to invest outside America but still likes the idea of doing so, buying shares of a multinational company could be for them.

Multinational U.S. stocks basically represent our homegrown companies that also conduct business in countries outside of our borders. MacDonald's, Coca-Cola, and Toy 'R' Us are multinational companies, having stores and selling products all around the world. In fact, in 1995, well over half of Coke's revenues came from outside the U.S.

Owning shares of a well-established blue chip multinational company is one way to diversify ones portfolio in a creatively conservative fasion; owning shares of a small-cap company just beginning to do business overseas is a whole lot risker.

STOCKS GROUPED BY INDUSTRY

Along with grouping stocks by their personalities, stocks can also be grouped by industry. Here are a few examples:

Retail: Apparel
Gaming: Casinos
Lodging: Hotel
Computers: Software
Telecommunications: Electric and Gas
Pharmaceuticals: Drugs
Financial: Banks and Brokers
Real Estate: Land and Housing

Works Cited:
Vujovich, Dian 10 Minute Guide to the Stock Market New York, United States of America: Murtha, 1997

Where the Money Goes: What I've Learned

2007-11-15T09:46:00.000-08:00

To know how stocks get to the market and start the trading process, one must think BIG.

For openers, while all corporations that are formed issue stock, not all stocks are publicly traded. A small mom and pop shop might be incorporated, but all the shares may be divided amongst the owners, or their close friends and relatives. While the value of the stock is stated in corporate papers, the stock is privately owned. When it is exchanged, it's usually done among a closely knit group of people.

But a publicly owned corporation is an animal of a different nature. These companies are generally quite large and employ a number of people. They also have made the management decision to go to the marketplace to pick up the cash necessary to see that their business stays competitive and hopefully continues to grow. This decision on Wall Street is referred to as "going public". And, the first time a brand new company decides to go public, its stock offering is called an Initial Public Offering, or IPO. IPOs trade on what is referred to as the Primary Market.

THE PRIMARY MARKET

There wouldn't be a stock market if there weren't a primary market. The primary market is where it all begins, how the money machine gets moving, and where established businesses and entrepreneurs raise the cash they need to get or keep their business rolling.

Two kinds of stock trade in the primary market-Initial Public Offerings, or IPOs, and new issue shares of already established, publicly owned companies.

Every publicly traded company gets its Wall Street feet wet as an IPO. In a nutshell, here's what it takes for a company to go public:

First, after making the decision to become a public company, knowing fair-well that the decision means giving up power, the company contacts an investment banker or brokerage firm to handle the "going public" process from beginning to end. That investment banker or brokerage firm then finds underwriters for the stock. One thing underwriters do is agree to purchase a specific number of stock and then sell it to the public.

Before the stock can be sold to the public, it has to be registered with the Securities and Exchange Commission, SEC. During the registration process, a specific number of shares that are to be traded is decided upon; the company's financial data must all be disclosed; potential investors need to be notified about the new stock offering through what is called a "tombstone ad" in the newspaper (its called a tombstone ad because of the fine-line border around it, but more importantly, because it isn't an ad soliciting sales but one of notification); and finally, prospectus is created and made available to prospective buyers.

The moneys received from the sale of an IPO get placed in an escrow account until all the shares of that offering are sold. After they are sold, the offering is said to be "closed" and a transfer agent records, distributes, and releases share ownership accordingly.

One of the continuing roles of the underwriters of an IPO is to "make a market" in the company's shares after the initial offering date. So, the next time you see an ad in the business section of the newspaper announcing a stock offering, all the names listed in the bottom section of that announcement will be the names of that stock's underwriters.

Along with providing a company with cash, going public can help a company gain recognition-but the move also opens its financial books to scrutiny.

New issue stocks also trade on the primary market until all shares are sold. The difference between a new issue and an IPO is that new issues come from established companies that have decided to raise capital by issuing more stock, and from companies already trading on the exchanges. Initial Public Offerings do not.

Some key terms:

Prospectus: A printed summary of a company's business outlook, including its current and future business plans, which describes the details of the company and of the current stock offering including risks. A prospectus is a legal document that must be given to every investor who purchases a registered security during its initial offering.
Underwriter: 1) A person or company that underwrites shares or bonds. 2) A person or organization that finances something; backer.
Escrow Account: A contract, deed, bond, or other written agreement deposited with a third person, by whom it is to be delivered to the grantee or promise on the fulfillment of some condition.

MORE ABOUT INITIAL PUBLIC OFFERINGS

IPOs are hot properties these days. Since the early 1980s-when individuals got their share of the IPO market until today when the big institutions and mutual funds gobble up all shares first-these new stocks have, in some cases, made profits look easy to make.

According to two professors who studied the performance of 4,753 IPOs that came to the market between 1970 to 1990, the best performance results happen during an IPO stock's first day of trading. The study found that from the first through the fifth year of trading, the average annual returns on an IPO lagged other stocks by 7 percentage points. This led the professors to conclude that if investors don't get in on an IPO before trading begins, they are better off investing in established companies.

But remember just because an IPO has a great first day doesn't mean they all will. Investors need to be aware that the marketing of IPOs is one thing and the performance of the underlying stock is quite another.

THE SECONDARY MARKETS

After a stock makes it debut and all shares of the IPO or new issue allocations are sold, it begins trading in the secondary markets. They're the ones most investors are familiar with.

Unlike money raised through an IPO or new issue, which, after fees are paid to investment bankers and others involved in the process, goes to the company itself, the money exchanged as stocks are bought and sold in the secondary markets goes to the seller of the stock. That means the normal individual. Or, the money goes to companies that own stocks in their portfolios like banks, insurance companies, and mutual funds. In other words, once a stock starts trading on the secondary market, the money from the sale of that stock belongs to the people or institutions trading it and not the corporation that issued it.

WHAT AFFECTS A STOCKS PRICE

There are billions of reasons a stocks price goes up or down, and there is no guarantee either way. Either of these may be substantiated by a company's financial picture; based on investors' sentiments, timing, and emotions; or reflect a combination of all of the above.

Most money managers have specific guidelines that they follow as they weed through the thousands of stocks available looking for the ones they hope will increase in value over the years. Some look for companies that have a price-earnings ratio of under 12. Some want companies with no outstanding debt. Others want company's sales to have grown by at least 20 percent for the last five years before they'd be interested in buying. Most want the company's stock to trade actively. Some want all of the above and some have other lists of criteria to follow.

But no matter what the financial fundamentals a money manager looks for before deciding whether or not to invest in a company, he or she knows that there is more to stock picking than the bottom line. Things like business cycles, natural disasters, and political and social events can all affect the prices on stocks as does the time of the year, and just plain timing in general.

Emotions can also play a part in how the market is reacting to certain stocks as can an optimistic-bullish-or pessimistic-bearish-economic outlook.

All of which means there's usually not just one reason why the price of a stock moves over the short-to medium-run. Over the long haul, however, prices-as reflected in the DJIA-have moved upward. Keep in mind that just because the Dow is moving upward doesn't mean the stock or stocks you've invested in have. The DJIA is an average of 30 stocks, and as such is merely a reflection of the blue chip market. Your portfolio of stocks is the other thing, and needs to be monitored as such.

Works Cited:
Vujovich, Dian 10 Minute Guide to the Stock Market New York, United States of America: Murtha, 1997

The Different Kinds of Stock: What I've Learned

2007-11-15T04:57:00.000-08:00

Just as there are a number of different uses for the word "stock" there are a number of different kinds of stocks that companies can issue. Each one appeals to the different needs investors have, preferred stocks, for instance, provide income for shareholders.

Basically there are two different types of stock-common stock and preferred stock:

Common Stock: Common stocks are the most popular kind of stock issued and are consequently are owned by more people and institutions that any other kind of stock. When a person buys shares of a common stock, they're part owner of the company issuing the stock and will share in the risks and rewards of the company. Plus, they will be entitled to receive any dividends the company declares-if the company decides to pay them. Dividends are either paid in the form of cash or as a Stock Dividend-which means instead of being paid money an individual would acquire more shares of that company's stock. But, no matter whether the company does or does not pay a dividend, if that company's stock price rises, the value of that persons shares will also increase. Owning shares of common stock more often than not means a person will have voting rights. Founders Stock is another kind of common stock. These shares, too, have their own rewards, including voting rights for the company's founders.

Preferred Stock: Like common stock, preferred stock represents ownership in a company, but with a few added perks. First of all, preferred stocks pay dividends, and those dividends get paid to preferred shareholders before any dividends are paid to the shareholders of a company's common stock. Another perk for the preferred stock is, if a company should go bankrupt, after all the creditors are paid, holders of a preferred stock have a claim to the remaining assets of the corporation-if there are any. Their claim to those assets get first dibs-ahead of the shareholders of common stock. On the other hand, the shareholders of preferred stocks often don't have voting rights. Plus, these stocks don't usually have the growth potential that common stocks do. That's why preferred stocks are considered similar to bonds: Both are without voting privileges, the size of the dividend to be paid is usually fixed, and price appreciation isn't the primary reason for buying the security-the income is.

There are also different kinds of preferred stock, some examples would be:

Cumulative Preferred: Shareholders of this kind of preferred stock know that if the company misses any dividend payments, they have the right to receive all of what's owed to them sometime in the future when the company resumes its dividend payment schedule.
Participating Preferred: Along with dividend income, and after all dividends have been paid, shareholders of this kind of preferred stock can participate in the dividend increases.
Adjustable Rate Preferred: Dividends on this stock will fluctuate according to changes in interest rates.
Convertible Preferred: Shares here can be converted into a specified number of common stock shares at a date sometime in the future.
Callable Preferred: These shares can be "called" back to the company at a future date. That means the company has the right to buy back the stock from its shareholder at pre-stated per-share prices.

A CLASS SYSTEM

There is also an alphabet of different share classes with A, B, C, and so on, that may be issued. Unfortunately, there are no carved-in-stone rules regarding what each class of stock represents. So, one company's B shares may have rights, while another company's won't. That means once the definitions of a common stock and preferred stock are understood, the characteristics of each class will differ from company to company, as will the risks and potential rewards, dividend payments, price appreciation, and shareholder rights. It is therefore up to the individual to find out all about the class of stock you've invested in and what rights and privileges go along with it.
Companies may issue more than one class of common stock, such as Class A and Class B shares, and so on. The stock classes don't just stop with "B" but can go up depending upon the corporate financing needs of the company. These classes of stock are called Classified Stock, and each one has its own investment parameters. If a person were to invest in a company's classified shares, they should understand the rights and privileges of each. They can find this information from their broker or better yet, from the company's shareholder services department.

COMMON STOCKS AND ECONOMIC ENVIRONMENTS

Looking at the universe of common stocks from another point of view, stocks are sometimes lumped into different groupings depending upon their dividend payment history, what the company makes, what they hope to make and what's happening in the economy.

For instance, Income Producing Stocks refer to a company that has a long history of consistently paying dividends. Blue Chip Stocks represent those offered by the largest and best-established companies in America, like MacDonald's. And Emerging Growth Stocks refer to a new companies' stocks.

There are also Defensive or Staple Stocks, like food and pharmaceutical companies, so called because their market values aren't supposed to get hurt as badly as other groupings of stocks when there is a downturn in the economy or when the country is in a recession. The performance of Cyclical Stocks, like those that produce durable goods such as paper, cement, and steel, usually depends upon business cycles; when there's a flurry of new homes being built across the country, companies manufacturing concrete and steel are likely to prosper.

Penny Stocks are those whose per share prices are less than $1.00. These are considered very risky investments, and there's no telling how an investment in them will fare no matter what the economic environment is.

STOCK RIGHTS AND STOCK WARRANTS

In addition to common and preferred stocks, companies may also issue stock rights and stock warrants. Both are similar in that they allow investors the right to buy stock at a future date at a specific price.

Stock Rights are a short-term proposition that work like this: If a company that already is publicly traded decides to issue some new shares of stock, stock rights may be issued to give existing company shareholders the opportunity to buy some of those new issue shares below the current market price on the date those stocks are being issued. The amount of stock the shareholder may purchase in a stock offering will be in proportion to the number of shares already owned.

Stock Warrants are long-term deals. Holders won't receive any dividends or retain other rights of stock ownership, but they do have the opportunity to purchase a specific number of shares of common stock at a later day, at a specific price.
Warrants may or may not trade on the exchanges like stocks do. Those that do provide a way for speculators, who expect the price of the stock to rise above the one set forth by the warrant, to play the market. But the main idea behind stock warrants is value-added incentives. Here's why: If a warrant allows you to buy a set number of shares of a stock below the current market price, doing so would give that warrant intrinsic value. That is, you could use the warrant to purchase the stock, then turn around and sell that stock and make a profit.
Warrants often have expiration dates 5 and 10 years from their date of issuance. A warrant that comes attached with a new stock issue is called a Unit.

Works Cited:
Vujovich, Dian 10 Minute Guide to the Stock Market New York, United States of America: Murtha, 1997

The Stock Markets: What I've Learned

2007-11-14T21:24:00.000-08:00

Stocks are traded on markets. A market is just another word for a system used to trade like securities.

There are basically four types of markets:

The Exchange Market: This market is made up of two national exchanges, the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX)-both are private associations-and regional stock exchanges. To trade stock on an exchange one must be a member of it, and then follow its rules and regulations. Members of an exchange are said to hold "seats" on the exchange. These seats, which can sell for anywhere from a few hundred thousand to millions of dollars depending on market conditions, give a person or institution the opportunity to buy and sell listed securities on that exchange.
Over-the-Counter, (OTC), Markets: Thousands upon thousands of more stocks for sale can be found here. That's because the OTC market is made up primarily of small and brand-new companies. The largest OTC market for stocks is NASDAQ. Unlike the exchanges, where the buying and selling of stocks occurs at one central place, there is no "home office" for the OTC market. Business for the OTC stocks is conducted on the telephone and through a computerized quotation system.
The Third Market: Is a market primarily for non-exchange member firms.
The Fourth Market: This market is for the institutions and the direct trading among them. This market allows buyers and sellers-such as equity traders, mutual funds, market-makers, and others-to negotiate trades anonymously among one another.

Things to keep in mind when a person is keeping an eye on their stock:

Know it's exact name
The symbol for the class of share you purchased or are interested in.
The abbreviation used to identify it in the newspapers and in the markets.

Listed and Unlisted Securities:

Listed Security: Is a stock, or bond, that's been accepted for trading on an exchange, like the NYSE or the AMEX. To be listed a company has to meet certain requirements set forth by the exchange.
Unlisted Security: Securities that trade on the NASDAQ and in OTC markets.

The differences between markets:

The difference between the exchange markets and the OTC market is how stock prices are arrived at.
The exchange markets, like the NYSE, are auction markets: Supply and demand creates a security price-stocks are sold to the highest bidder and bought for the lowest offer.
The over-the-counter market is a negotiated market: Prices are worked out between buyer and seller. OTC security prices can vary from market-maker to market-maker. A market-maker is a firm that owns a substantial amount of stock that it sells through the OTC market.

Pink Sheets:

Very small companies-like the ones whose stocks often trade for pennies, or fractions of them per share-that trade in the OTC market and aren't part of NASDAQ, can be found on what's called Pink Sheets. This listing of stocks is actually printed on pink paper and is published everyday.

Don't get confused:

Though the terms OTC and NASDAQ may seem interchangeable-one referring to the other and vise versa. In reality, OTC stands for "over-the-counter" market, whereas NASDAQ is an acronym for the National Association of Securities Dealers Automated Quotation system, a computerized system that provides stock prices, or stock "quotes", to stock brokers and dealers for the stocks traded in the OTC market.

Who regulates the markets:

Some good things that came out of the 1929 crash was the creation of new U.S. securities laws. These laws made the securities industry more successful. These regulations are looked at by federal and state levels, exchange and other self-regulatory levels, as well as on personal and individual levels. The primary watchdog of the securities industry on the federal level is the Securities and Exchange Commission (SEC). The SEC exists because of two acts passed after the crash in 1929: The Securities Act of 1933 and the Securities Exchange Act of 1934.

The first, the Securities Act of 1933, was originally called the Truth in Securities Act. As the name implies, prior to it, truth and trading didn't always go hand-in-hand. This act, among other things, required that any security, before it is offered for sale to the public, must first be registered and that disclosure about a company's financial picture be made available to interested investors.

The second, Securities Exchange Act of 1934, created the SEC and allowed for that federal agency to administer what was laid out in the Securities Act of 1933. This act is sometimes referred to as the Exchange Act. Some of the issues covered in it include outlawing any misrepresentations and/or manipulations of securities, the registration of broker/dealers, and the regulation of insider transactions, trading activities, client accounts, and the OTC market.

The National Association of Securities Dealers (NASD) was created in 1939 to oversee the OTC market and NASDAQ. And, mutual-fund investors will be pleased to know that the law regulating their investments is the Investment Company Act of 1940. An "investment company" is another way of saying "mutual fund".

Works Cited:
Vujovich, Dian 10 Minute Guide to the Stock Market New York, United States of America: Murtha, 1997

Why People Buy Stocks: What I've Learned

2007-11-14T17:11:00.000-08:00

Money is the primary reason people buy and sell stocks. Most people invest in stocks to make money from those investments, and public corporations that issue stock do so to raise money.

Stock and bond markets, known as capital markets to financial professionals, have been one of the primary sources of money for U.S. businesses throughout the years. Each year, hundreds of small businesses go to Wall Street to finance their growing businesses or to ensure they have money for research and development. Midsize and large companies often issue more shares of their company's stocks to finance the expansions of their companies as well.

Shareholder: One who owns shares in a corporation. People can be shareholders in corporations that are publicly owned, like those that trade on Wall Street; privately held, in which case shares are not publicly exchanged in the marketplace; or shareholders of investment companies-the technical term for mutual funds.

SHAREHOLDERS RIGHTS AND PRIVILEGES:

Knowing that money is the big deal behind every stock issued or purchased, being a shareholder means a person is an owner of that firm. As an owner a person has certain rights and privileges.

A stock certificate, if a person wishes to have one. A stock certificate is a piece of paper that states-among other things-the name of the corporation, the number of shares a person owns, a CUSIP number or identification number, and the name of the owner of the shares. However, now that computers are replacing paper, the issuance of stock certificates isn't as popular as it once was. So instead, the records of stocks are done electronically and transferred to an individual's brokerage firm account.
The right to sell your shares, buy more of them, or transfer ownership of them to someone else. That someone else could be a person or and institution, such as a charity.
The right to a dividend if the company decides to pay one. A dividend is a sum of money paid to the shareholders of a corporation out of earnings. There is no law stating that all publicly traded companies must pay dividends to shareholders. Dividends are simply shareholder "perks", and not all companies pay them. Again, dividends are not guaranteed. Just because a company pays a dividend once is no guarantee that it will continue to pay dividends, or that in the future dividends will be equal to previous ones. A company's decision of when, if, and how much dividends to pay depends on two things: 1) If they made profit and have money to spend, and if they want to spend that money paying their shareholders a dividend. 2) A company's board of directors decides whether or not to pay a dividend and how much it will be.
The right to a share in the growth-or demise-of a company. As an owner in a publicly traded corporation, you get a share in that company's ups and downs. On one hand, a person will enjoy the financial rewards of that company should the per-share value of the corporation's stock increase in value while you own shares of it. On the other, a person will share the losses that company may go through if the value of its stock decreases. If a company were to head south, going broke, closing it's doors, and leaves oodles of debt behind, the worst that can happen is the value of the shares you own will fall from the price you paid down to $0.00. Being a shareholder is not like being a parent or someone's primary caregiver: The debts a company leaves behind are not a shareholders responsibility.
The right to be informed. Shareholders are entitled to receive all sorts of information about the company they are part owner of. They are entitled to receive everything from the company's annual report to its corporate minutes to invitations to its annual meetings.
Voting rights. With each share of stock a person owns comes one vote, provided the stocks a person owns is not non-voting stock. In that case, voting privileges are waived. Shareholders vote on things like whether or not they want the company sold, should a suitor be at hand, or for a change in the company's board of directors. Voting can be done in person-at a company's annual meeting, for instance. Or it can be done by proxy, via the mail. Remember though, the more shares a person owns the more they have a say.

Some things to note:

Stocks perform their best when inflation is low and business cycles are high.
Every time the Dow Jones Industrial Average has crashed, it has always risen, usually to new record highs.

When it comes to the bottom line, there are two good reasons to buy stocks: 1) In the hope that the per-share value of a stock will increase, or capital appreciation. 2) For the dividend income a company may pay.

Works Cited:
Vujovich, Dian 10 Minute Guide to the Stock Market New York, United States of America: Murtha, 1997

Who Owns Stocks: What I've Learned

2007-11-14T16:52:00.001-08:00

Stocks are owned by literally everybody. People, brand-new and well established institutions, insurance companies, pension funds, banks, churches, the employed, the unemployed, the retired, and the list goes on and on.

Surveys showing stock ownership typically break the who-owns-stocks question into two categories: Households and Institutions.

Household: According to the Federal Reserve, a "Household" is not just limited to individuals; it also includes entities such as non-profit organizations, unit investment trusts, churches, and other categories not accounted for elsewhere.
Institution: According to the Federal Reserve, an "Institution" includes private pension funds; mutual funds; public pension funds; foreign investors and institutions; life insurance companies; bank personal trusts; other insurance companies such as fire, casualty, and auto insurance; close-end funds; broker/dealers; savings institutions; and commercial banks.

Things to keep in mind:

Risk: Don't think for a minute that investing in stocks is not a risky business. Every investment made has an element of risk to it. There are no risk-free investments in the stock market.
Timing: As in when a person sells and purchases their securities. This is everything.

Works Cited:
Vujovich, Dian 10 Minute Guide to the Stock Market New York, United States of America: Murtha, 1997

The World of Stocks: What I've Learned

2007-11-14T15:58:00.000-08:00

Equity: Another way of referring to stock, or the ownership right that shareholders in a company possess.
Stock: 1) The ownership of a corporation that's represented in shares. Each share of stock has a stake in the corporation's earnings and assets, the value of which typically changes over time. 2) Another way of referring to the inventory in a store or manufacturing plant.
Fiat Currency: Money with no intrinsic value. The currency of the United States is an example. That means the value of the money is in the eye of the beholder and not in what is backing the currency itself.
Securities: A document indicating ownership or creditorship; a stock certificate or bond.
Interest: A fee paid on borrowed assets, such as money or shares.
Capital Investment: 1) Money used by a business to purchase fixed assets, such as land, machinery, or buildings. 2) Money invested in a business with the understanding that the money will be used to purchase fixed assets, rather than used to cover the business' day-to-day operating expenses.
Assets: Any property owned by a business or individual. Tangible assets are like money and property. Intangible are things like goodwill.

Five lessons can be learned from the history of the stock markets:

Emotions can and often do play a big part in the stock choices people make.
Not all stocks make money.
Investment is a risky business.
It's best to keep a cool head and exercise some thoughtful evaluation before you buy shares of stock.
The road to riches for stock investors does not now, nor has it ever, followed a straight line upwards.

Works Cited:
Vujovich, Dian 10 Minute Guide to the Stock Market New York, United States of America: Murtha, 1997