Stocks Basics: What Causes Stock Prices To Change?

Definition of stocks

Stock is a share in the ownership of a company.

Stock represents a claim on the company's assets (актив) and earnings.

A stock is represented by a stock certificate.

As you acquire more stock, your ownership stake in the company becomes greater.

Holding a company's stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim (albeit usually very small) to everything the company owns.

As an owner, you are entitled to your share of the company's earnings as well as any voting rights attached to the stock.

Risk

• It must be emphasized that there are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many others do not.

However, an investment in stocks has historically had an average return of around 10-12%.

Debt vs. Equity

• It is important that you understand the distinction between a company financing through debt and financing through equity

Why does a company issue stock? Why would the founders share the profits with thousands of people when they could keep profits to themselves? The reason is that at some point every company needs to raise money. To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock. A company can borrow by taking a loan from a bank or by issuing bonds. Both methods fit under the umbrella of debt financing. On the other hand, issuing stock is called equity financing. Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way. All that the shareholders get in return for their money is the hope that the shares will someday be worth more than what they paid for them. The first sale of a stock, which is issued by the private company itself, is called the initial public offering (IPO).

Stocks Basics: How Stocks Trade

Some exchanges are physical locations where transactions are carried out on a trading floor. The other type of exchange is virtual, composed of a network of computers where trades are made electronically.

The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the risks of investing.

The primary market and the secondary market.

• The primary market is where securities are created (by means of an IPO) while, in the secondary market, investors trade previously-issued securities without the involvement of the issuing-companies. The secondary market is what people are referring to when they talk about the stock market. It is important to understand that the trading of a company's stock does not directly involve that company.

• World-Stock-Exchanges.net features a list of world stock exchanges, securities commissions and other regulatory agencies, as well as stock market resources.

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Stocks Basics: What Causes Stock Prices To Change?

• 1. At the most fundamental level, supply and demand in the market determines stock price.
2. Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless.
3. Theoretically, earnings are what affect investors' valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors' sentiments, attitudes and expectations that ultimately affect stock prices.
4. There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.

Buying Stocks

• 1. Using a Brokerage
The most common method to buy stocks is to use a brokerage. Brokerages come in two different flavors. Full-service brokerages offer you (supposedly) expert advice and can manage your account; they also charge a lot. Discount brokerages offer little in the way of personal attention but are much cheaper.

At one time, only the wealthy could afford a broker since only the expensive, full-service brokers were available. With the internet came the explosion of online discount brokers. Thanks to them nearly anybody can now afford to invest in the market.

2. DRIPs & DIPs
Dividend reinvestment plans (DRIPs) and direct investment plans (DIPs) are plans by which individual companies, for a minimal cost, allow shareholders to purchase stock directly from the company. Drips are a great way to invest small amounts of money at regular intervals.

• DIPS

• Some companies actually encourage individual investors to own shares by selling them to you directly. Called Direct Investment Plans, more and more companies are using these as a way to sidestep what they perceive as the high fees charged by transfer agents to run a Dividend Reinvestment Plan externally. These companies simply run the Direct Purchase Plan from within, selling shares to the investor without ever needing to deal with another party.

• Pros

• Investors like DIPs because they do not need to already own one share.

• DIPs tend to be low fee and offer more extra services like IRAs.

• Cons

• Very few companies have DIPs, although they are increasing in number.

• DIPs normally require a high initial investment or a fixed monthly investment for a fixed period of time to participate.

• Not all DIPs are immune to the high-fee disease spreading through the industry.

• DRIPS

Dividend Reinvestment Plan / Optional Cash Purchase Plan (OCP)

All Dividend Reinvestment Plans (DRPs) require that you own one share before you get to participate -- otherwise they would be Direct Investment Plans (DIPs). This is the most common form and they spring historically from the infrastructure that companies set up to allow employees to buy stock from the company (see History of DRPs).

(Again, remember that even though investors say DRP, short for Dividend Reinvestment Plan, this name is a bit of a misnomer as they are really talking about the Option Cash Purchase Plans where you can buy new shares, not just the DRP where you reinvest dividends.)

If you need to own a share before you can become part of the plan, what's a poor Fool to do? How can you get that first share? Thankfully, there is a whole range of possibilities for a Fool to explore. We will first lay out all of the basic elements that you need to get done and then throw up a list of some of the possibilities.

Pros

· You can invest in more companies

· Low initial investment

Cons

· Need to get the first share somehow

· Sometimes have high fees

· Rarely offer additional services, like IRAs

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Date: 2016-01-03; view: 767