The Basics of Stocks
«Those who are ignorant in investment history are bound to repeat it. Historical investment returns and risks of various asset classes should be studied. Investment results for an asset over a long enough periods (greater than 20 years) are a good guide to the future returns and risks of that asset. Further, it should be possible to approximate the future long-term return and risk of a portfolio consisting of such assets.» – William Bernstein, the Intelligent Asset Allocator
What, Exactly, Are Stocks?Stocks are shares in a company. When you buy shares of a company, you, yourself, become a part owner of that company. As a shareholder, you get the same basic rights and privileges as people who own millions of shares. You can receive quarterly reports and an annual report with information on how the company is doing.
If the company makes money, your stock’s value will increase. When the company loses money, your stock’s value will decrease. Quarterly reports tell how much money the company has gained or lost during the reporting period. This will keep you updated on how well, or poorly, your stock is doing.
The annual report is a combination of all the quarterly reports. Fancy charts and graphs are usually included. They give detailed financial and business information about the company. There would never be a time when you couldn’t be fully aware about your stocks health.
How Do They Work?If a company wants to raise money (capital), one of its options is to distribute stock. Stocks can raise money without making a debt, or to not create a legal obligation to pay back borrowed funds.
Most investors are in stocks for the money. They expect to be paid more than they paid themselves. Investors expect their investment to earn more for the company, than any other form of investment. If the return on investment is high, then the price usually increases. So, if the earnings go up, the price goes up.
In the long run, stocks have beaten most of the other alternatives to investing. It’s proven that a long-term investment will usually gain more money then any other type of investment will in the same amount of time. In other words, stocks are the way to go.
How Do I Pick The Right Ones?People who invest in stocks are normally either Technicians of Fundamentalists. Technicians look at stock prices from the past to predict future prices. They usually buy and sell stock in a very short time. Most of the time they ignore fundamental (basic) like: book values, dividends, and earnings (profit). Young investors should know of the high transactions costs and the high taxes when trading stock all the time.
Fundamentalists look at how much the value of a company grows over a long period of time. They look for what might be best in the future. Certain things they look for are earnings, dividends, and book values. They expect that the stock prices will go up as those companies’ earnings grow in the long run. Fundamentalist, also known as value investors, ignore the daily ups and downs of the stock market.
There are key parts to investing that everyone should know. If you’ve picked a good stock, then keep it. If it’s making money then there is no need to get rid of it. You should always pick the best of them all. If you just buy the best company in the business, you should always do alright. Try not to worry about new companies. It’s good to study them to see if they might soon be a dominant one. The leaders of the company are good to consider. Good leadership makes a difference in companies’ earnings. Get rid of the losers. If you want to be a successful investor, then you need to know when to cut some stock loose. If it just keeps going down, don’t wait for them to cut back.
What Is A Stockbroker?Most stocks are bought through a broker. There are three different kinds of brokerage firms: full service brokers, discount brokers, and deep-discount brokers. They all buy and sell stocks, bonds, and mutual funds. They are also all regulated by the same security rules in the Securities and Exchange Commission (SEC).
Full service brokers charge higher commissions then the other 2 brokers do. The cost is $100.00 or more as a minimum charge. Discount brokers don’t cost quite as much. Their minimum is around $30.00. The deep-discount brokers charge flat fees. Those are ranging form $12.00-$15.00 for each order. If you pay the higher fees, you are entitled to investment advice and research reports, unlike the discount brokers.
What Is A Portfolio?A portfolio is a group of stocks, few or many, owned by an investor. To have a good portfolio, select a diverse group of stocks from different types of businesses. This is help is not change as much and minimize risk, compared to stocks from a single industry. With different types of stocks, the price changes usually cancel each other out since some values increase and other decrease.
Here is an example of a portfolio:
|Number of Shares
|11/05/01 Close ($)
|Gain / Loss (%)
What Are The Advantages?Stocks have a long historical record of outperforming other investments. Those include bank deposits, money-market funds, CDs, and bonds. Also, a stockholder or shareholder has voting rights that bondholders and bank depositors don’t have.
What Are The Disadvantages?Stock prices usually go up and down, and aren’t even guaranteed. If you invest in stocks, you are taking the risk of losing your money. Any investor could lose all or part of his money.