Stock Market Basics

Stock Market Basics - Common Stock vs Preferred Stock

2008-05-19T19:42:00.000-07:00

Types of stock – common vs. preferred

The type of stock most commonly that you will see in the market is the normal stock or which is known as common stock. In fact most of the companies issue that stock only.

You would wonder why the common stock is different than the other stock known as preferred stock and why the companies issue them. As a stock market basics student you should know the difference if you want to buy the correct type of stock and earn money.

What is different is the way the voting rights are issued to people and also that drives how the preferred stocks have less risk than the others. Let us say the company wants to have the voting rights restricted to a certain set of people but also wants the general public to invest in stock but does not want to give them much voting power.

Now this voting power is generally needed to get resolutions and agreements done at the Annual general body meeting or the extraordinary general body meeting. Suppose hypothetically if the entire general public ganged up against the company then you can always have the resolutions blocked and the may be have some things be approved with the people managing the company having no say in the decisions.

To avoid these kinds of situations it is required sometimes by the company to offer preference shares to certain investors who are more than likely to side by the management. These preference shares usually will carry more voting power than the general class of shares. For example preferred shares will have ten voting rights per share as opposed to common shares which will have only one vote per share.

The preference shares have a fixed dividend and they are assumed to be like a hybrid between shares and bonds. Also in the event of liquidation these stock are known to be very much like the common stock apart from the fact they will come in first to get any assets upon liquidation and then will come the common stock holders.

Classes of Stock

Several companies also offer different classes of stock which may be helpful for the voting rights differentiation as well. If you are reading a stock market ticker you would notice the class right next to the stock symbol e.g share XYZ will be marked as XYZa and XYZb or XYZ.a and XYZ.b

Hope you enjoyed this stock market basics lesson about classes of shares.

Stock Market Basics - Risk vs Return

2008-05-18T15:22:00.000-07:00

As your learn the stock market basics you will need to make sure your understand the basics of what is Risk vs Return theory.

The risk of owning a stock which may or may not do well can be quite a handful. However if you play your cards well the returns will be greater. Let me give you an example in the case of the bonds let us say a company will say they will pay oout 7% interest on the bonds. That means you are now bound to earn 7% annualy on your investment whatever may be the state of the economy or the company.

However let us say if you buy a stock which does not give out any dividends but you still go ahead and buy the stocks. This stock will be with you let us say for a few years. These years may see the economy in general go up and then down. But the fact is that the stocks can average 10-12% over a period of few years. Yes, that is correct but in may so happen that the company goes bankrupt or goes into serious problems and not able to recover such that you will ultimately have to sell at a loss or hold the shares in the hope of the rebound of the company's fortune. What that menas that you carry the risk of the losses and it may so happen that you lose all your money however you will make much more money in case of the company doing well.

As a stock market basic rule the higher the risk higher the return but in turn the higher return may not always be true but also can be likely high losses.

The trade off of risk vs return is everywhere and as they say stock market is not for the faint hearted . You should have appetite for risk and stomach for riding over the losses for longer periods of time till the tide turns and you rake in huge abnormal profits.

That means what is the time horizon for your investment and for a short term player the appetite for risk should be larger than the appetite for risk for long term players. I will detail in another session of the stock market basics what is short term versus long term investments.

Stock Market Basics - Debt Vs. Equity

2008-05-18T15:00:00.000-07:00

As a stock market basics student what you need to understand is how the stock is issued and what impact does it have on the company in terms of its shareholding as well as what happens when the company takes on more debt than it is supposed and also how the stock market looks upon the debt vs equity.

As a company owner you can do two things either borrow from somebody or borrow from the public and make them part owners of the company.

When the company takes on loan from the bank or issues bonds it is known as debt financing. As a debt financing strategy you do not want have more debt o your books that means that you need to have more progits to repay that debt.
When you buy the bonds of the company you are assured that the company will pay you a certain amount of interest every year and at the at end of the specified year the original or the principal amount will be paid back to you.

On the other hand when a person takes a loan and does not return that then it is a case of bad credit personal loans.

The other case is equity financing where the company offers the stock to several investors including public and it is known as initial public offering. In this the investors buy the stock in the hope that the company will do well and they will some day part with the stock at a value more than what they bought it for. The company benefits as they do not have to repay anything as well they have absolutely nothing to pay in terms of interest payments . This is what really the stock market basics is for you in terms why people issue stocks and are willing to part ownership of the company.

They can pay the investors some part of the profit called dividends but that is not mandatory. in fact a lot of companies do not even issue dividends for most of the formative years of the company. In the cae of equity you are not assured anything and there is absolutely no guarantee that you will get your money back in case the company does not do well or even when the company goes bankrupt . In case of the liquidation of the company the first right is of the debtors and the next right is of the preference share holders and then come the shareholders.

Let me reiterate this importnat fact of stock market basics, which tell you that you make money from the stock market only if the company does well and you are willing to take risk.

Stock Market Basics : What is a Stock ?

2008-05-17T20:56:00.000-07:00

The best way to understand the stock market basics is to understand the basic definition of a stock. For the sake of understanding of the definition of a stock we will assume that you have a company by the name of JCK Inc. which sells greeting cards . Now this company you have launched a year ago and this company needs money to run the business . What you do for the money yu need is two things either you have money from the bank or ask for people who are interested in having a part wonership of the company.

As an enterpreneur you will sell some part of the compay and how will you do that is by selling shares of the company to these people. The shares of the company JCK in our case will be say 20 shares each to be given to five investors. So the total number of shares in the company are 100.

Now let us go onto the opposite side and say that you are one of the people who bought the shares of the company JCK. Let us assume you bought the shares at $10 each. Now after two years this company needs more money so this company will actually go to the public and say that are you willing to buy some of the shares of the company at a certain price. This price is determined by the sales and revenue and the future revenue of the company. Let us assume that in year two the company sold the shares to the public at $20.

In the world of stock market basics this is what the stock in reality is . These stocks are issued by the corporations and in the earlier ear you had the stock of the company in the form of the paper but in the computer age the brokerage houses actually hold these shares in an elecronic format.

As a shareholder of the company you are entitled to whatever the company's assets are . However in reality what happens is very different. If you are an investor then you need to undErstand that even though you are a shareholder for a tiny part of the company , you have no say in the day to day running of the company. You are simply buying stocks.The company is run by the shareholder who has the majority shareholding usually more than 51% and also the approval of the board of directors of the company for the fact is that it is the board that eventually selects the company management.

The stock market basics dictate the fact that all the shareholders come in the last for the fact of claiming the assets in the case of liquidaton of the company. This gives in to the fact that what is debt and who gives them and how does it differ from the equity of the company. In fact some companies issue preference shares which are different than the ordiantry shares.
Update : If you need to know in detail about managing your Personal Finances then visit this blog

More on the debt vs Equity and the class of shares later and till then learn the stock market basics in an easy simple way here.

Stock Market Basics - Details

2008-05-16T14:52:00.000-07:00

As you start to invest and make your money grow you would need to have to learn the stock market basics to trade effectively and without losing your shirt in the mad place called the stock exchange.

A lot of people say that owning stocks is like owning the company, which is true but that may be because you have what is known as the passive investment strategy whereas some investors like a more aggressive strategy of selling and buying and make money on a short term.

I will cover both of those and several others in investing styles lesson. The other lesson to learn is called the risk appetite of a person. That is what essentially drives the behavior of a stock trader. Some like to play a risky game as they more cushion of money and some like to play it safe. They say that risk pays which is true as stock market is all about what you think and sometimes no pain and no gain theory is very relevant in the context of stock market basics.

Then there are several types of stock exchanges that are available to us where we can trade and they can be NASDAQ or American Stock exchange or the NYSE. Nowadays you can also trade overseas with the opening up of the new economies like INDIA, China and Brazil.

Next is the type of stocks that the companies issue and as a beginner you should know the basics of investing in these kind of stocks. The factor that drives how you make profit is the way companies go public and those are known as IPO’s. These initial public offerings make sure that promoters dilute their stake and the public gets the equity in the company. I will detail those later in a separate lesson.

Secondary market where the action is and you would ask me what is secondary market and that is what I will again detail in a separate lesson. Most stock exchanges are examples of a secondary market.
Tip - Invest in a good stock option software.

Then there are various types of analysis which people do for buying or selling a particular stock. I can look at the behavior of the stock for a period of time and say what is happening and then buy when I feel based on the past historical data that the timing is right or for that matter sell also. This data patterns is what in the stock market basics terminology is known as technical analysis. There are various types of software available for doing this technical analysis on a stock by stock basis.

Some people base their decision looking at the companies’ management or by looking how the company has performed in the industry it is competing. Some look at the macro economic as well as micro economic indicators affecting the economy and in turn how it will affect the company. This type of analysis in the stock market basics is known as Fundamental Analysis.
It is this type of analysis whic ha made Warren Buffett as th second richest man in th world.He is known as the Oracle of Omaha for this reason only. He ia known for his stock picking abilities and basic understanding of stock markets.

The stock market basics terminology is a very important thing to learn as you would keep hearing the terms bulls and bears. Bulls are positive persons by nature of what they think of a stock and bears are taking a negative view of the stock.

The next thing you need to learn is to understand how the stock market works as in why people sell, why people buy and then what are brokers, online trading and how the commissions are charged. The whole working of the stock market should be clear including what are settlement dates and what is rolling settlement and what is clearance.

As you have known by the now you best source of information on the stock market is the newspaper or even news channel. How to read those newspapers or decipher the information given in them is essential as an active or passive stock market investor.

As a trader you would other software and tools which I will discuss in detail in later lessons.

Welcome to world of stock market basics and make money through stocks.

Stock Market For Basics

2008-05-15T22:13:00.000-07:00

Stock Market Basics - An Introduction

In today's world making money via the stock market and also investing for long term through the stock market is a sure bet to get more than average returns on your money.

Welcome to world of Stock Market Basics and enjoy the journey into the world of Stock and Exchanges and companies and investing based on rumours, fundamental analysis and technical analysis

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2008-04-09T14:04:00.000-07:00

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