A share of stock represents a fractional ownership stake in a business corporation. Corporations issue stock in order to raise money for their business operations. Individuals and organizations that buy this stock become part owners of the business. The more stock one purchases the greater the fraction of the business one owns.
With the purchase of stock an investor assumes the rights and responsibilities of a part owner in the business no matter how small his stake in the business. One of those rights is the right to elect the board of directors. The board of directors oversees the operations of the company. They are also responsible for selecting the Chief Executive Officer (CEO), who runs the day to day operations of the company and reports to the board. Investors also have a right to receive dividends if dividends are declared. The amount of dividends an investor receives is based on the amount of stock they own. Companies declare dividends as a way of sharing profits, but they are not obligated to do so.
Why would one invest in the stock of a company? The primary reason that investors invest in stock is they hope to sell their stocks for a higher price than they bought it for. Hence the popular saying, buy low, sell high. Some investors also invest in stocks in order to earn a steady income from regular dividend payments.
Stocks can be classified according to certain investment characteristics that they posses.
Stocks of high quality corporations that maintain a leadership position in their industry are usually classified as BLUE CHIP stocks examples include Microsoft, IBM , Coca-Cola, Wal-Mart. These stocks are generally considered safe investments and are favored by cautious investors.
Stocks that pay a high portion of their profits as dividends to investors are termed INCOME stocks. They are sought out by investors who want to earn a steady income stream from their investments. Stocks of Public utilities are good examples of income stocks.
Stocks that move as the economy moves are referred to as CYCLICAL stocks. When the economy experiences a downturn they do poorly and when the economy is booming they do great. Examples of such stocks are auto industry stocks, steel stocks and industrial chemical stocks.
Stocks that are immune from the general economic condition are known as DEFENSIVE stocks. These stocks are not seriously influenced by what is going on in the general economy. Good examples of these are grocery, alcohol and utilities stock. The demand for their products and services remains constant in good or bad times.
Stocks that are expected to report higher than average earnings and sales revenues and reinvest most of their profits are often classified as GROWTH stocks. Growth stocks are often highly sought after because their stock price tends to rise quickly. Growth stocks can be found in any sector, but they are usually found in the technology and pharmaceutical sectors. Eventually, a growth stock will stop growing at an above average rate. Examples of past growth stocks include Microsoft, Cisco systems, Genentech, Starbucks and McDonalds.
Investors looking to buy or sell stocks simply contact their broker, and then place an order for a specific amount of stock. The broker then states the bid price- the highest price buyers are willing to pay for a stock- and the ask price-the highest price sellers are willing to sell a stock for. The investor then decides whether to place a market, stop or limit order. A market order instructs the broker to buy or sell at any available price and its executed immediately. A limit order, on the other hand, is an order to buy a stock at no more, or sell a stock at no less, than a specific price, within a specific time limit.
A stop order much like a limit order, is only executed when a price is reached, the difference being that a stop order becomes a market order when that price is hit and the order is executed at whatever available price. So if an investor with a stock worth $ 90 places a stop order to sell at a price of $ 80, once the price of the stock drops to $ 80 ,the order becomes a market order and then the trade is executed at the best available price. Once the trade is executed the broker then provides confirmation to the investor. Most trades are usually executed in less than a minute.
Stocks continue to outperform all other forms of investment and will continue to remain an integral part of the U.S financial system.
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