STOCK INVESTMENT BASICS, DON'T INVEST BEFORE READING...

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Stock Investments Basics:

By MS; Copyrights

What are stock or shares in a company?

Stocks are equity investment in a company or ownership fraction of it. The proportion of ownership of a company will depend on the number of shares offered and the number of these owned by an individual or other entity.

Example:

A Company has a total stock of 2000 shares, and the company offers 1000 shares for sale (This is 50% of their total stock) and other company or individual buys 100 shares, because he buys 10% of these shares (50% of the total stock) he now owns 5% of the company.

Initial P.O. Offering.

When a company decides to become public so general investors can buy stock, they do offer an initial stock offering called Initial Public Offering or I.P.O for short. The reason for a company going public is to increase it capital availability, normally for new investments and growth.

Secondary Offering.

When a company has already issued an IPO and needs to raise additional capital, they can offer a second set of shares called Secondary Offerings, but this normally affects the IPO shares value.

Institutional Investors:

This type of investors are institutions not individuals or persons, examples of these types are retirement and mutual funds, pension funds etc.

Types of stocks:

Common stocks

These stocks form the majority of stock treaded every day in the USA, this kind of stocks do not assure any money gain or profits and solely depend on the company performance and on investors demand.

Preferred Stocks

This kind of stocks are companies shares traded as common stocks but at reduced risk to the investors, but at the same time with limited profit.

The dividend payments are assured and paid before the payments for common stocks are done, preferred stocks don’t earn more profit dividends if the company performs better.

Blue Chips stocks

Blue Chips stock are stocks of the most profitable and largest corporation, this classification list isn’t official and can vary.

Cyclical Stocks:

Are stock that depend on cycles of the economy, example are stocks from the tourism industry, construction, automotive etc.

If the economy in general goes bad, these are some the main industry sectors affected, however medical/pharmaceutical and food are much less affected due to obvious reasons.

Income stocks:

These are stocks that pay dividends periodically, these are stock preferred when investor are looking to receive income several times a year.

Growth stocks:

These are stocks that pay little or no pay dividends at all, most of the profits are reinvested back into the stock

Companies are also classified in accordance with their capitalization volume:

The stocks of companies of different sizes are classified as:

Small Caps: Companies with capitalization less than $1500 millions

Mid Caps: Companies with capitalization of more than $1500 millions up to $5000 millions

Large Caps: Companies with capitalization of more than $5000 millions

Stock Splits:

With time, stock shares can rise so much in value making them expensive for most investors with the added result that they may think that the price has reached it’s maturity level and no more appreciation could be possible, making them even harder to sale. When this condition has been reach, many companies decides to split the stock, offering twice or more the number of share at half the price, (or proportional to the split) in order to make them more affordable and attractive to investors.

For example if a company has 1000 shares at $100 each, by going 1 to 2 split they can offer 2000 shares at $50 each.

Stock Reverse Splits:

Reverse split is the opposite of Stock Split in which a company decides to reduce the number of shares and proportionally increase the price to meet stocks minimum requirements to make it more appealing to investors, too chip stocks can be also detrimental on investors perception.

Stocks Dividend Yields:

SDY is how much dividends you get in annual bases on the purchase price you paid for a share.

Example:

If you paid $100 per one stock share, and you gets a $10 dividend in one year, then your SDY is 10%.

Most companies pay dividends quarterly and payment dates varies from company to company.

How stocks are bought:

Stocks are normally bought from a brokerage firm with membership in a stock exchange , the agent serving the trades are called the brokers.

The brokers work for a specific brokerage firm or firms for a commission.

Brokers:

Full Service Broker:

As this name entitles, these brokers provide full range of brokerage including buying and selling stocks, investment planing, investment consulting etc. Normally this kind of brokers are the most expensive commission and fees wise.

Discount Brokers:

Perform stock trades at discounted fees and commissions but their services are less extensive. Normally these are found on line, and the trades are performed via Internet or phone

Deep discount brokers:

Same as Discount brokers but at even more discounted fees, their services could be even more limited that those of Discount Brokers.

Most of the trades are done via Internet.

Market Order:

Is an order given to your broker to buy or sale at the current stock price.

Limit Order:

This limit order is used when you want to put a limit on the selling or buying stock price you want to trade. This is as a preventive measure to not to pay to much or not to sell too low.

Example:

You can instruct your broker to buy stock from an “X “ company at maximum price of $20 per share, but if the stock price surpass this limit, per say $20.20 the trade is not executed. In the other hand if you put a limit on the stock sale price per say at $19.00, and the stock price drops below $19.00 the trade is not executed.

Round lots:

A Round Lot is like a de facto tock shares trade unit and it means 100 shares, most of the the shares are treaded in round lots because it most economic, since

many brokers would charge your more for non round lots shares trades.

Stop Order:

Is to instruct you broker to buy or sale at current stock price when the shares have reach a predetermined target price called the Stop Price.

GTC-Good ‘Til Canceled:

You can tell your broker to proceed with a GTC for you Stop or Limit Order which means “ The stop or limit order is good until it’s fulfilled or canceled by me”.

Note: The GTC is good only until the end of the trading day or as otherwise indicated.

Selling Short:

Is like asking your broker to lend you 500 shares at current market price (per say $10 each), lets say that at this moment you owe your broker shares not money, so it will be OK to pay back the shares rather than the money, so you can instruct you broker to sale these shares at $10 each so you can get $5000.

Then you wait the shares to drop in value, per say at $5 each the you buy them now for $2500 and pay back the shares to your broker and you profit the $2500 difference minus interest, commissions and fees. Although you pay back the shares to your broker, it will be an incurred interest and commission that you till have to pay for the value of the share you borrowed, be aware that if the shares price goes up rather than down, the you will lose money because you still have to pay the shares plus any interest, commission and fees.

Buying on Margin:

Buying on Margin is getting lent money from your broker to buy shares. This lent money come with interest and at least you are a experienced investor you have to do it very carefully and limited since it could be very risky, If you loose your invested money you still to have pay the borrowed money plus interest and possible other fees. They are some limits on how much money you can borrow for Buying on Margin. Normally you can buy on margin up to 50% of you

total shares investment, for example if you buy $20,000, you can barrow up to $10,000 on margin.

They are some regulation that requires that you total margin account balance to be 75% of you purchasing max, although you are limited to invest only up to 50% on Buying on Margin. Also when you Buy on Margin there is minimum required for you Margin Account Balance.