The Basics of Stocks
Uploaded by Christin_Dangel on Feb 10, 2002
“Those who are ignorant in investment history are bound to repeat it. Historical investment returns and risks of various asset classes should be studied. Investment results for an asset over a long enough periods (greater than 20 years) are a good guide to the future returns and risks of that asset. Further, it should be possible to approximate the future long-term return and risk of a portfolio consisting of such assets.” – William Bernstein, the Intelligent Asset Allocator
What, Exactly, Are Stocks?
Stocks are shares in a company. When you buy shares of a company, you, yourself, become a part owner of that company. As a shareholder, you get the same basic rights and privileges as people who own millions of shares. You can receive quarterly reports and an annual report with information on how the company is doing.
If the company makes money, your stock’s value will increase. When the company loses money, your stock’s value will decrease. Quarterly reports tell how much money the company has gained or lost during the reporting period. This will keep you updated on how well, or poorly, your stock is doing.
The annual report is a combination of all the quarterly reports. Fancy charts and graphs are usually included. They give detailed financial and business information about the company. There would never be a time when you couldn’t be fully aware about your stocks health.
How Do They Work?
If a company wants to raise money (capital), one of its options is to distribute stock. Stocks can raise money without making a debt, or to not create a legal obligation to pay back borrowed funds.
Most investors are in stocks for the money. They expect to be paid more than they paid themselves. Investors expect their investment to earn more for the company, than any other form of investment. If the return on investment is high, then the price usually increases. So, if the earnings go up, the price goes up.
In the long run, stocks have beaten most of the other alternatives to investing. It’s proven that a long-term investment will usually gain more money then any other type of investment will in the same amount of time. In other words, stocks are the way to go.
How Do I Pick The Right Ones?
People who invest in stocks are normally either Technicians of Fundamentalists. Technicians look at stock prices from the past to predict future prices. They usually...