The Basics of Stocks
Some investors feel the stock market is
too risky so they avoid it altogether. They put their money into conservative vehicles
such as money market accounts or CDs. What they don't realize, however, is that stocks
have consistently performed better than any other type of investment -- including treasury
bonds, corporate bonds, metals or real estate.
Remember. A small difference in your annual return can mean a big difference for your
retirement nest egg over time.
What is a Stock?
A stock represents part-ownership in a publicly-traded corporation. So if you own 1000
shares of a company with 100,000 shares of stock outstanding, you really own 1% of that
company. Each share that you own also entitles you to certain legal privileges -- voting
for a new board of directors, deciding if the company should issue more stock, etc. The
more shares you own, the more power you will have in major company decisions.
Companies issue stock on the open market for a variety of reasons. Many raise cash because
they want to expand their core business or build infrastructure. By opening up company
financials to public praise or scrutiny, others use it to raise legitimacy of the
business. By going public, companies give up part of their decision-making control to
shareholders -- the ultimate trade-off.
Why Invest in Stocks?
As a shareholder, you stand to profit when a company is successful. But you also stand the
chance of losing your money should the company fail. Stocks offer no guarantees -- only
There are two ways an investor who buys stocks will profit. The first is through dividend
payments. These are earnings paid back to shareholders as cash. To compute a stock's
dividend yield, simply take the dividend and divide it by the stock's current price. So if
XYZ stock issued a annual cash dividend of $1.00 per share and the stock's last trading
price was $25, the dividend yield will be 4% ($1.00 divided by $25). Stocks that pay
consistent dividends are known as income stocks.