Common Stock Benefits
When you own a share of common stock, you own a piece of the company. Thus, your financial returns tend to go up and down with the financial returns of the company in which you invested. You can make a great deal of money in the stock market; you can also lose your entire investment. There are no guarantees in this investment arena.
Common stock is sold initially by the corporation and then traded among investors. Investors who buy stocks expect to make money in at least two ways. One way to make money is by being paid dividends, which are their share, as an owner, in the profits of the company. Another way to make money is through the appreciation of the price, of the stock. If the stock price goes up, their investment is worth more.
It is important to understand that common stocks offer no performance guarantees, but over time they have produced better returns than other investments.
^back to top
Preferred Stock Benefits
There is another type of stock, called preferred stock, which is designed to work almost like a bond, which we will be discussing next. This type of stock usually pays a fixed dividend which is paid to stockholders prior to any profits going to common stock holders by way of dividend payments. These stocks are designed to produce income and therefore fluctuate in price less than common stock. They offer more price stability, less risk, but also less opportunity for appreciation. Some preferred stock can be converted to common stock.
Preferred stocks also represent ownership in a company. Like common stock, these shares are issued by the company and traded by investors. However, they differ from common stock in several ways. First, the dividend paid to a preferred shareholder is paid before any dividends are paid to common shareholders. While they are paid first, preferred shareholder's dividend payment does not increase or decrease with the fortunes of the company. The payment is fixed. This greatly reduces the risk associated with a preferred share of stock.
Along with that reduced risk comes limited opportunity for growth. Preferred stock prices usually increase more slowly than do the prices for common shares. This is due in part because of the fixed nature of the dividend payment.
^back to top
Choose Specific Stocks
The question that is foremost in many investors' minds is "Which stock do I buy?"
There are as many formulas and tips as there are investors. But there are a few resources you should always consider when investing. Read the company's financial reports. Review the stock pages in the newspaper or information on the Internet. Do some number crunching on your own.
First, look at the financial information the company provides. Every publicly held company must publish its financial information at least annually in its annual report.
Annual reports usually include:
A section outlining the company's business philosophy
Detailed reports on the company's business operations
Financial information including a balance sheet of assets and liabilities
Footnotes to financial information which can reveal company problems
An auditor's letter reassuring shareholders that the information is accurate
All in all, the annual report provides an accurate and fair look at the operations and profitability from the company's point of view. The company might also tell you about their future prospects in the annual report.
You can evaluate the company based on the financial pages in the newspaper or on the internet.
Welcome to the Auto Insurance Seminar
^back to top
How To Buy Stocks
There are several people from whom you can buy stock:
* Brokers act as agents to execute buy and sell orders from the investing public. If you, as an individual, want to buy or sell a stock, you will likely use the services of a broker. A broker makes his or her money by charging you a fee for buying or selling the stocks on your behalf.
* Dealers are people or firms that buy and sell securities on their own account rather than by acting as agents for other people. They make their money by selling stock at a higher price than they bought it.
* Investment Bankers, also known as underwriters, buy new issues directly from corporations and sell them to individual or institutional investors.
* Traders buy and sell for their own accounts. People who buy or sell for broker/dealers or financial institutions are also called traders.
* Round lots are blocks of stock -- usually 100 shares. This is the most common manner in which to buy stocks. Smaller investors often can purchase an odd lot -- as few as a single share of stock -- or any number they can afford. Brokers often charge more to buy and sell odd lot orders.
* Direct from the company - you can contact a company and purchase stock from them directly. They will send you the stock certificates.
Along with there being a variety of people from whom you can purchase stock, there is also a variety of commissions. Be sure to be aware of the services you need. Compare the services you actually receive with the prices you pay.
^back to top
Know the Bond Quality
Some bonds are more risky than others. And the riskier bonds pay higher interest rates than the less risky bonds. You can determine the risk or quality of a bond by its rating. To help bond buyers, independent organizations such as Moody’s and Standard & Poor’s rate bonds for relative risk and investment quality. Usually the more assets and earning power an issuer has compared to its debt, the higher its bond rating.
Bonds rated from AAA to BBB are considered investment quality. Lower rated bonds (BB or lower) may be more volatile and are considered to be of speculative grade. The BB and B rated bonds are considered “Speculative.” CCC, CC, and C rated bonds are considered junk bonds as are bonds rated D.
Treasury Bonds are not rated. The assumption is that they’re absolutely solid since they are obligations of the federal government and backed by its full faith and credit.
^back to top
Use Professional Money Managers? Mutual Funds
Most investment professionals agree that it's smarter to own a variety of stocks and bonds than to gamble on the success of a few. But diversifying can be tough because buying a well-diversified portfolio of. individual stocks and bonds in a variety of markets and industries can be very expensive. And knowing what to buy – and when - is often a full time job. However, you can let the professionals handle it.
Mutual funds offer a way to diversify on a budget. When you put money into a mutual fund, your investment is pooled with money from other investors to create much greater buying power than any one individual would have. This way, you own a piece of a large and well-diversified portfolio.
Through a mutual fund (or other types of packaged products, like a variable annuity or Unit Investment Trust or even using a private money manager), you can gain a far greater degree of diversity than you would be able to on your own because your money is pooled with the money of other investors into a larger portfolio in which you own a share.
With these managed investments, you can invest: Aggressively, moderately or conservatively and extend your investments domestically, internationally or globally. There are thousands of mutual funds, so you can invest in a fund that has an investment philosophy that matches your investment goals. And, there are different types of shares, different fee structures and many ways to purchase funds. You may becoming familiar with mutual fund investing because of a 401(k) or 403(b) plan offered by your employer where you have self-direction of the funds.
^back to top
Appreciate Fund Advantages
Mutual funds offer many advantages. The most important of which we stated as the professional management of the portfolio. Each security is selected and actively managed by professional portfolio managers who make investment decisions based on the fund's investment objective. Other benefits include:
Liquidity: Mutual fund shares are easily bought and sold at current market prices.
Reinvestment of Dividends: Most mutual funds allow for the automatic reinvestment of dividends, which puts the power of both compounding and dollar cost averaging to work for you.
Affordable: Most mutual funds have low investment minimums making them accessible to nearly everyone. Fee structures vary between mutual funds. Make sure you understand all the charges before investing.
Each mutual fund defines its investment objectives in its prospectus. The prospectus tells you the type of securities and the investment philosophy of the mutual fund.
Mutual fund prices are based on their net asset value (NAV), the market value of one share of the fund at the end of the trading day. Daily NAVs appear in the financial pages of most newspapers; Basically they show five items: Fund Name, Footnotes, Net Asset Value, Change in dollars and cents from the previous day, and Total Percentage Return of Investment (which differs each day of the week, as to the time frame shown).
