Thursday, March 18, 2010

The Basics of Stocks

This is from one of my recent weekly "Smart Money Monday" Segments on Waco/Temple/Killeen NBC affiliate KCEN 6.

1. What is a stock?

Stocks – also known as equities – are securities that represent ownership in a corporation. And if you’re a “shareholder” of a business, you have a claim to part of the company’s earnings and assets.

2. There are two basic types of stock - common and preferred shares. What should someone know about each type?

Shareholders of common stock usually have voting rights and investors purchase common shares for growth potential. While preferred shareholders usually don’t have voting rights, they have priority over common stock if a company goes bankrupt. Investors purchase preferred shares for income since they pay higher dividends than common shares.

3. What are some of the basics involved in purchasing a stock?

To buy stocks you’ll need a brokerage account either online - where commissions and fees tend to be lower – or through a traditional stockbroker.

The most important aspect of buying stocks is thoroughly researching companies. You can use research from companies like Standard & Poor and Value Line, and is a useful website.

4. What are some of the types of stocks investors should consider?

Location (Domestic vs. Foreign) – Most investors should have a mix of US and international stocks since foreign markets can do better than the US market at times (and vice versa).

Style (Growth vs. Value) – The earnings of “growth” stocks are expected to grow at above-average rates and “value” stocks are thought to be undervalued. It's usually a good idea to have a mix of both styles in your portfolio.

Size (Market Cap) – Larger companies tend to be more stable and pay higher dividends while smaller companies have been more volatile but have performed better historically. Since past performance is no guarantee of future results, consider having exposure to both large and small stocks.

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