Introduction to Stocks

Stock Terms Definition
Selling New Stock
Buying or Selling Stock
Selling Short
Buying Stock On Margin
How to get information on Stocks?
Sifting Stock Information
Evaluating Companies
Evaluating Stock
What's a Stock Market?
Reading The Averages
Market Indexes
Market Cycles
International Markets

A stock is a piece of the corporate pie. When you buy stocks, or shares, you own a slice of the company.

Stocks are equity investments. If you buy stock in a corporation, you have an ownership share in that entity. You are, then, described as a stockholder or shareholder. You buy stock for, mostly, two reasons. 1) You expect it to increase in value, or 2) you expect the corporation to pay you dividend income or a portion of their profit. 

The first one is called growth stock and the second one is called income stock. Many stocks provide both growth and income.

When a corporation issues new stock, it gets the proceed from that initial sale. After that, shares of the stock are traded in open market. It can be bought or sold among investors., but the corporation gets no additional income. The price of the stock moves up or down depending on how much you and other investors are willing to pay for it at the time.

Common Stock - Most stock in the U.S. is common stock. If you buy common stock, there are no guarantees you will make money. You take the risk that the stock will not increase in value or pay dividends. You make money when the price of the stock goes up and you sell it. On the same token, you will lose money when the price drops and you sell it.

Preferred Stock - Preferred stocks are also ownership shares issued by a corporation and traded by investors. They differ from common stock by reducing investor risk, but they may also limit reward. The amount of the dividend is guaranteed and paid before dividends on common stock.

One big advantage is that if a company goes under and fails completely, the preferred stockholders have greater chance of getting some of their investment back. However, the dividend is not increased if the company profits, and the price of preferred stock increases more slowly.

Stock Splits - When the price of a stock increases significantly, you and other investors may be reluctant to buy. The reason may be two fold. One, you think the price has reached its peak. Second, it costs so much that you cannot buy it.

In order to stimulate trading, corporations have the option of splitting the stock to lower the price. When the stock is split, there are more shares available. The total market value, however, remains the same.

The initial effect of a stock split is no different than getting four quarters for a dollar. But the price may move up toward the presplit price, increasing the value of your stock. Stocks can split three for one, three for two, ten for one or any other combination.

Reverse Splits - In a reverse split, the corporation exchanges more shares for fewer - say six shares for one - and the price increases accordingly. Typically the motive is to boost the price so that it meets a stock market's minimum listing requirement. Doing this can also make the stock attractive to institutional investors, including mutual funds.