Introduction to Stocks and Investing
Objectives
•
Explain What is a Stock
•
Explain the Types of Stocks
•
Explain the Classification of Common Stock
•
Describe the Role of Beta in Your Portfolio
•
List the Various Stock Screening Criteria
•
Explain the Types of Analysis in Stock Trading
•
Explain the Ratios for Valuing Firms
•
List the Criteria for Choosing a Broker
•
Explain the Common Stock Investing Strategies
•
Explain the Steps of a Typical Stock Transaction
•
Explain How to Read Stock Quotations
•
Explain the Calculation of Price-to-Earnings Ratio (PE)
•
Explain the Key Terms of Stocks and Investments
•
Describe the Rights of a Stockholder
•
Describe the Various Investment Options
Introduction
Peter Looney works as an executive.
For a long time, Peter has felt that he should invest the extra amount of
money that he makes from his job.
Introduction
He has been saving in cash form for a long time.
However, he wants that he should use the saved amount to invest in
something that could help him multiply his money and help grow his
finances.
Introduction
Peter has always thought of starting a business venture to grow his money,
however, he is greatly averse to the huge amount of risk involved in any
business venture.
So, Peter starts asking advice from his colleagues about what possible
investment options are available in the market.
Introduction
George, one of Peter’s colleagues, advices him to invest in stocks and
mutual funds.
Stocks are the capital raised by a corporation through the issue of shares
entitling holders to an ownership interest also known as ‘equity’.
Introduction
Mutual funds are an investment vehicle made of pool of funds collected
through a regulated investment company from many investors.
This pooled money is then used for the purpose of investing in securities
such as stocks, bonds, money market instruments and similar assets.
Introduction
Money managers operate the mutual funds by investing the fund's capital
and attempt to produce capital gains and income for the fund's investors.
George tells Peter that by investing in stocks and mutual funds, Peter can
earn a small share of the great profits that big and successful organizations
make for themselves and their shareholders.
Introduction
George tells him that although Peter will get to enjoy a part of the profit
made by the organization, he will be spared of the hassles of running a
business on his own, and also will undertake a much lesser risk than if he
would have to run a business on his own.
Therefore, although stocks and mutual funds would help Peter to multiply
and grow his money, he would be able to do so by taking advantage of the
stability and experience of these fast growing and stable organizations that
have been operating and making profits for decades.
Introduction
George also adds a word of warning for Peter.
He tells Peter that the most important thing that he should keep in mind
while investing in stocks and mutual funds is that he should determine the
maximum risk that he is willing to take.
Introduction
Peter should always make sure that he never invests more than his risk
taking capacity.
George assures Peter that if he takes calculated risks and invests wisely;
then stocks and mutual funds prove to be a very lucrative way of growing
his money.
Introduction
Therefore, you can understand that investing in stocks and mutual funds
are a great way to multiply and grow your money by undertaking
calculated amount of risk according to one’s own risk taking capacity.
Let us learn about stocks and investing in detail.
Objectives
•
Explain What is a Stock
•
Explain the Types of Stocks
•
Explain the Classification of Common Stock
•
Describe the Role of Beta in Your Portfolio
•
List the Various Stock Screening Criteria
•
Explain the Types of Analysis in Stock Trading
•
Explain the Ratios for Valuing Firms
•
List the Criteria for Choosing a Broker
•
Explain the Common Stock Investing Strategies
•
Explain the Steps of a Typical Stock Transaction
•
Explain How to Read Stock Quotations
•
Explain the Calculation of Price-to-Earnings Ratio (PE)
•
Explain the Key Terms of Stocks and Investments
•
Describe the Rights of a Stockholder
•
Describe the Various Investment Options
What is a Stock?
•
Any business needs money or capital whenever it has to
start its operations or expand its business operations.
•
Thus, in order to raise this capital for a business start-up
or expansion, the corporation would offer shares of stock
for sale to the public.
What is a Stock?
•
By selling these shares or stock to the public, the
company is able to increase its finance reserves and also
get the necessary funds to start operations or expand its
operations.
•
So, any individual who purchases a ‘share’ or ‘stock’ of a
company becomes a part owner of a portion of that
company, based upon the number of shares purchased
compared with the number of shares that make up the
company’s total stock offering.
What are Stock Exchanges?
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Why Stocks should be in Your Portfolio?
•
It has been found over several decades that, as
an asset class, common stocks have
outperformed all other major asset classes.
•
Also, stocks deliver strong long-term capital
gains.
•
They prove to be one of the best and most taxefficient types of return.
Why Stocks should be in Your Portfolio?
•
You should include stocks in your diversified
portfolio because the individual stocks in a
diversified portfolio can reduce the overall risk of
your portfolio.
•
Dividends and capital gains are taxed at a lower
preferential federal tax rate and so if tax planning
is done wisely, then stocks can prove to be taxefficient assets.
Objectives
•
Explain What is a Stock
•
Explain the Types of Stocks
•
Explain the Classification of Common Stock
•
Describe the Role of Beta in Your Portfolio
•
List the Various Stock Screening Criteria
•
Explain the Types of Analysis in Stock Trading
•
Explain the Ratios for Valuing Firms
•
List the Criteria for Choosing a Broker
•
Explain the Common Stock Investing Strategies
•
Explain the Steps of a Typical Stock Transaction
•
Explain How to Read Stock Quotations
•
Explain the Calculation of Price-to-Earnings Ratio (PE)
•
Explain the Key Terms of Stocks and Investments
•
Describe the Rights of a Stockholder
•
Describe the Various Investment Options
Types of Stocks
There are two main types of stocks that are offered by any company such as follows:
12
Common Stock
Preferred
Let’s look at each in detail.
Stock
Common Stock
Common Stock is a ‘voting stock’. Hence, any individual who has purchased the common stock of
a company is entitled to vote for appointing the officers of the company and it’s Board of
1
Common Stock
Directors. Thus, common stock is the ownership share in publicly held company.
Common stock holders have a residual claim on a company’s assets. Each common stockholder or
shareholder of a corporation is entitled to certain rights and obligations. Thus, each common
stockholder has the right to vote. Moreover, if a common stockholder is not able to vote in
person, he can give a written consent to give permission to someone else to vote on his behalf as
a proxy.
Common Stock
Common Stock is a ‘voting stock’. Hence, any individual who has purchased the common stock of
a company is entitled to vote for appointing the officers of the company and it’s Board of
1
Common Stock
Directors. Thus, common stock is the ownership share in publicly held company.
Common stock holders have a residual claim on a company’s assets. Each common stockholder or
shareholder of a corporation is entitled to certain rights and obligations. Thus, each common
stockholder has the right to vote. Moreover, if a common stockholder is not able to vote in
person, he can give a written consent to give permission to someone else to vote on his behalf as
a proxy.
Preferred Stock
‘Preferred Stock’ as the names suggests has a preferential position over common
stock. Therefore, during the payout of dividend to share holders, it is first paid to
2
Preferred
Stock
preferred stock owners before common stock holders.
Preferred stock is also ownership shares of a company.
However, it differs from common stock because in preferred stocks, the dividend is
guaranteed and paid before dividends on common stock are paid. On the other
hand, if profits of the company increase, the dividend for preferred stocks isn’t
increased accordingly.
Preferred Stock
‘Preferred Stock’ as the names suggests has a preferential position over common
stock. Therefore, during the payout of dividend to share holders, it is first paid to
2
Preferred
Stock
preferred stock owners before common stock holders.
Preferred stock is also ownership shares of a company.
However, it differs from common stock because in preferred stocks, the dividend is
guaranteed and paid before dividends on common stock are paid. On the other
hand, if profits of the company increase, the dividend for preferred stocks isn’t
increased accordingly.