Contents
Stock Investing Basics
Types of Stock
Stock Indices
How to Determine Your Level of Risk Tolerance
How to Plan Your Stock Portfolio
How to Research Stocks
How to Buy and Sell Stocks
How to Manage Your Stock Portfolio
Stock Investing and Taxes
Learn more with these titles from Barnes & Noble
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- Understand stock prices, markets, and indices
- Read financial reports and research company fundamentals
- Pick stocks to build a balanced, tax-efficient portfolio
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Stock Investing Basics
A stock is a fractional piece of ownership in a company. Companies can offer their stock privately to employees or investors, or to the public. Publicly traded stocks are sold in shares, each of which has a share price that changes as demand for the stock rises and falls. When you buy a particular company’s stock, you become a shareholder.
What Is a Stock Market?
Stocks are purchased, sold, and regulated on stock markets, or stock exchanges. In the United States, the New York Stock Exchange (NYSE) and the NASDAQ are the two main stock exchanges. These exchanges are open for trading Monday through Friday from 9:30 a.m. to 4:00 p.m. Eastern time and are closed on weekends and major holidays. Some additional markets, such as Instinet, facilitate after-hours trading of stocks listed on the major exchanges.
Listing Requirements
In order to trade their stock on the major exchanges, companies must meet certain listing requirements established by a U.S. government body, the Securities and Exchange Commission (SEC), as well as the respective stock exchanges. These obligations include publishing quarterly financial results and meeting certain size and profitability benchmarks. Listing requirements serve two purposes:
- They provide investors with the information they need to make informed investment decisions.
- They limit listed companies to those that are most stable and potentially profitable.
Companies that fail to meet the exchange requirements over time are delisted, or removed from the exchange.
Stock Symbols
Each company listed on a stock exchange is assigned a stock symbol (also known as a ticker symbol), a unique combination of letters. Investors use these symbols to identify the companies whose shares they’d like to buy or sell.
- NYSE stock symbols: Contain 1–3 letters, such as “F” for Ford Motor, “HD” for The Home Depot, or “JNJ” for Johnson & Johnson.
- NASDAQ stock symbols: Contain 4–5 letters, such as “MSFT” for Microsoft, “ADBE” for Adobe Systems, or “WFMI” for Whole Foods Market.
Why Do Companies Go Public?
A company is said to go public when it sells shares to the general public for the first time, in an event called an initial public offering (IPO). IPOs force companies to undergo a level of scrutiny and public accountability that private companies avoid entirely. For instance, public companies must file official reports with the SEC and release their financial data to the public on a quarterly basis. Nonetheless, going public is attractive because it enables companies to raise money for business expansion without incurring debt.
Why Do Investors Buy Stock?
Shareholders invest in stock in order to build wealth. Stocks can make money for investors in two main ways:
- Capital appreciation: A company’s share price may increase over time, either because a company’s earnings (profits) rise or because investors get excited about the company’s future prospects for some other reason. If share prices rise, shareholders who bought at lower prices can sell at higher prices for a profit.
- Dividends: Some companies—often older, more established companies—return a portion of their profits to investors as dividends instead of reinvesting those funds back into the business. Dividends can be paid in cash or in additional shares of the company’s stock. A stock’s dividend yield is the ratio of the dividend to the stock price: for example, a stock that has a $100 share price and pays annual dividends of $5 per share has a dividend yield of 5%. The dividend yield changes over time as share prices fluctuate.
Why Does a Stock’s Price Change?
Stock investors look for companies that have the potential to grow and provide wealth through capital appreciation and dividends. If investors think that a particular company has a rosy future, demand for that stock will increase, and the price of that stock will rise. If investors think a company has poor prospects, demand for the stock will fall, as will the stock price. Stock prices fluctuate constantly during trading hours based on any information that might affect investors’ thoughts about a company’s future, such as:
- Company news: Any news that might impact a company’s future earnings can affect a company’s stock price, from reports of terrific profits, to a new product line that failed, to the arrest of a CEO. The news may be published by the media or by the company itself, via quarterly reports or press releases.
- Current events: Broader current events may affect multiple stocks or even the entire market. Dire events, such as a spike in oil prices, may cause stocks to fall in price or even to crash, while good news, such as the end of a war, can cause stocks to rally, or rise in price.
- Analyst ratings: Professional stock analysts release “buy,” “hold,” or “sell” ratings that reflect their views of a stock’s future prospects. An upgrade, such as a switch from “hold” to “buy,” often boosts a stock’s price; a downgrade often causes a stock’s price to fall.
Volatility
Volatility is a statistical measure of the short-term variation in a company’s share price versus that of the stock market as a whole. Stocks with high volatility are not necessarily riskier than stocks with low volatility—they’re just more likely to fluctuate in price. Volatility is expressed using a measurement called beta (see How to Research Stocks).
Stocks, Risk, and Return
Investing in stocks—even those considered the safest stocks—involves the risk of losing some, or all, of the money you invest. When investing in stocks for the short term (up to 10 years), invest only money that you’re comfortable losing entirely. When investing for the long term (more than 10 years), you can feel more confident that you’ll earn a return, or profit, on your investment.
- Over the short term (up to 10 years): Stocks are volatile and therefore very risky. You should never invest money in stocks if you’ll definitely need to use at a specific point in the near future.
- Over the long term (more than 10 years): Stocks’ inherent volatility is mitigated by the tendency of share prices to increase over time. Stocks consistently outperform the other asset classes; in that sense, they are preferable to alternatives (such as bonds and cash) over the long term. Over periods of 20 years or more, no other asset class has ever outperformed stocks.
Individual Stocks vs. Mutual Funds and ETFs
Owning individual stocks (stocks of specific companies) is riskier than owning broad selections of stocks, such as those offered by many stock mutual funds and exchange-traded funds (ETFs). For more specific guidance on these other investment options, see the Quamut guide to Mutual Fund Investing and the Quamut guide to ETF Investing, available in Barnes & Noble bookstores and online at www.quamut.com.
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