Sunday, February 17, 2008
Now that you know what a stock is and a little bit about the different types of stocks you may be wondering how you can get started buying stocks. In order to buy stocks you have to set up an account with a brokerage. Brokerage accounts are very similar to your everyday bank account except they allow you to buy and sell stocks. In exchange for this capability you have to pay a fee, or commission, for each transaction made. Depending on your account provider this commission could be anywhere from $5 to $50 but for the majority of small investors $10 per trade is the most common. One discount broker that I would highly recommend is ShareBuilder.
You may be surprised to hear that there is more than one type of stock that a company might issue.
Common stocks are the most common (naturally) type of stock investment. A common stock is a stock that gives it's owner certain voting rights in the company. Common stocks still have a claim to the company's assets and earnings as described in my last post, but the most common way to make money off of common stocks is to buy the stock at a lower price and sell it to someone else at a higher price. Common stocks have the highest average annual return out of all types of investments, but they also have the highest risk. Because common stock holders have less of a claim to the company's assets than bondholders and preferred stock holders if a company goes into bankruptcy common stock holders will often receive little or no money.
Preferred stocks are similar to common stocks but most of the time don't carry any voting rights. One advantage that preferred shares have over common shares is that preferred shares have a guaranteed fixed dividend as opposed to common stock dividends which are not guaranteed and are subject to change. Preferred shares also have a stronger claim to the companies assets than common share holders. If the company decides to liquidate then it's preferred shareholders are more likely to get paid than common stock holders.
Saturday, February 16, 2008
When a private company decides that it needs more capital for whatever reason, it may decide that the best way to raise this capital is through selling stock. This process of going public and selling shares is called an IPO or initial public offering. When an investor buys shares of stock that are being sold in an IPO the money that he spends buying the shares goes directly to the company which then can use it to fuel growth. In return for this capital contribution the investor is given partial ownership of the company. If a company issues 10,000 shares of stock in its IPO and you buy 1,000 shares of it, then you have a 10% ownership in the corporation. As an owner you are entitled to part of the corporation’s earnings, which are usually paid out by the company to its shareholders through dividends. Typically a company will only pay a portion of the earnings as dividends and then reinvests the rest to help the company grow. Most of the time you do not buy stock directly from the company but instead you buy it from another shareholder who for whatever reason has decided to sell his/her share of the company. Stocks are bought and sold on stock exchanges which help to bring buyers and sellers together. Stocks have a market value attached to them which is the price that it can be bought or sold for at that time. The market value of a stock is controlled by the laws of supply and demand. If demand goes up and more people what ownership in the company then an investor will be able to sell his shares at a higher price.