Stock Basics (Part 1) — What Is A Stock?


Alibaba Chairman Jack Ma celebrates his company's IPO at the New York Stock Exchange on September 19, 2014  — The Biggest Stock Offering In History. (Photo: Mark Lennihan/AP  

Alibaba Chairman Jack Ma celebrates his company's IPO at the New York Stock Exchange on September 19, 2014  — The Biggest Stock Offering In History. (Photo: Mark Lennihan/AP

 

Stock Basics (Part 1) — What Is A Stock?

Author: Emmanuel Modu ( eumodu@gmail.com )

A stock represents ownership in a company. Therefore, when you purchase stock, you become part owner of the company. The number of shares of a company's stock that you own generally indicates what portion of the company you own. For example, Walt Disney has sold 1.72 billion shares to the public. So if you owned ten shares of the company's stock, the percentage of the company you would own is .0000006% (10/1,720,000,000 = .0000006%). In general, companies sell stock to the public through a process called an Initial Public Offering (IPO) in order to get enough money to build their businesses. At the time of this writing, the biggest IPO in history was on September 20, 2014 when Alibaba Group Holdings (stock symbol: BABA) raised about $25 billion.

Now, let's consider what a stock is not. When you purchase stock, you are investing in a company. This is very different from when you purchase a corporate bond in which you are lending money to a company. When you buy the stock of a com¬pany, there is no guarantee that you will get your money back or that your stock will go up in value. By contrast, when you purchase a corporate bond, you will be repaid unless the company goes bankrupt. Even if the company does go bankrupt, the company's lenders will get paid back first (with the proceeds of the sale of the company's assets) before the stockholders get a penny. Because those who own stock in a company take on more risk than those who lend money to the company, it's important that Teenvestors (see definition of Teenvestor) understand the basics of the stock market.

 

COMMON & PREFERRED STOCK

There are two basic types of stocks:

•    Common Stock. Owning common stock entitles you to a share of a company's profit if the company decides to distribute those earnings by paying dividends. Common stock¬holders can also vote to determine a company's leadership and they can get a piece of the company’s remaining value if it ever has to be sold due to bankruptcy.

•    Preferred Stock. Preferred stock generally pays a fixed rate of dividends. More important, the preferred stock dividends must be paid before common stockholders get their dividends. Because pre-ferred stockholders get fixed dividends, they are not entitled to a larger share of the profits if the company does extremely well. On the other hand, they are taking on less risk because, if the company does poorly, they still get paid dividends before the common stockholders.

 

COMPANY SIZE
One of the ways investors classify companies is by size. The size of a com¬pany is important to investors because big companies are generally consid¬ered less risky (for example, safer) than tiny companies. This is because, as a rule of thumb, the value of the stock of a big company does not move up and down as quickly as the value of the stock of a small company. In addition, the profits of big companies generally don't grow or shrink as fast as the profits of small companies.

The size of a company is measured by its market capitalization, or market cap, as it is commonly known. Market cap is the total market value of a company's outstanding stock and it can be calculated as follows:

Market Cap = Price per Share * Number of Common Shares Outstanding

Market caps are classified in four main categories: large-caps, mid-caps, small-caps, and micro-caps. We recommend that Teenvestors invest in large-cap and mid-cap stocks—at least for your first few stock purchases. For example, General Electric stock is considered a large-cap stock. At the time of this writing, the market cap of General Electric was about $262 billion. 


WHERE TO GET STOCK INFORMATION
Teenvestors can get information about companies at several sites. We usually reference the following sites:

http://www.finance.yahoo.com

http://www.marketwatch.com

http://www.money.msn.com

http://www.morningstar.com

http://www.fool.com

You can get information about stock prices, market capitalization, and other information about companies through these sites. 

 

TO BE CONTINUED IN PART 2, COMING SOON