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The Basics of Stocks... Page 2
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Investors also profit by selling stock
at a higher price than they initially paid for it. This type of profit-taking generates
capital gains -- taxable profits that result from a stock's capital appreciation. Stocks
that reinvest profits back into the company instead of paying cash dividends are known as
growth stocks.
Common vs Preferred Stock
Common stock is the first type of stock issued by a corporation during its public
offering. Owners of common stock share directly in the success or failure of the company.
If the company is profitable, investors will reap rewards in the form of higher stock
prices or stock dividends. By owning common stock, investors are willing to accept more
risk in exchange for a higher profit potential.
Preferred stock also trades on the secondary market. But this type of stock is only issued
after common stock has been issued to shareholders. Preferred stock owners are entitled to
fixed dividend payments before distributions are made to common stockholders. And should a
company have to liquidate its assets for some reason, owners of preferred stock will be
first in line to receive their money back (after bondholders have been paid). Owning
preferred stock is considered less risky than owning common stock. You will not profit,
however, if the company is successful -- other than increased dividend payments.
Fundamental vs Technical Analysis
Two of the most common ways to evaluate stocks are fundamental and technical analysis.
Each method uses a different approach to picking stocks.
Fundamental analysis includes such factors as company earnings or projected growth rates.
The balance sheet of the company is normally examined to evaluate numbers like cash flow
or net income -- anything to help determine the company's financial condition. Investors
who apply this type of analysis are also concerned with how strong the company's
management team is or whether the company maintains a strong position against its
competitors.
Technical analysis ignores fundamentals and concentrates, instead, on trading activity.
Technical analysts are also known as chartists. Chartists attempt to forecast future stock
prices by identifying past movements, performance, or price trends.
Stock Calculators:
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• What is my return if I sell now?
• Should I sell before or
after one year?
• What future return makes selling now
worthwhile?
• What selling price provides my desired
return? |
