Types of Investments : Stocks

Stocks Basics :

Well, what is it about?

OWNERSHIP!

as blunt as that. Stocks is (a piece of ownership of the company usually)

This is ownership in the most literal sense: You get a piece of every desk, written agreement and trademark in the place. Better yet, you own a slice of every dollar of profit that comes through the door. The more shares you buy, the bigger your stake becomes.

OK, Then how exactly do you value a Stock?

The stock market itself is basically a daily vote on the worth or the value of the companies that trade there. All those guys screaming at each other? Their job is to take in the day's news and purify it down to a single question:

Will it help the companies I own make earnings in the future, or will it deter them from doing so? If the stocks you bought involves in a scandal or deteriorating public image, most likely to look for its shares to fall.

However,if strong economic power produces a more promising prospect better than PC sales, traders will buy with a vengeance.

Earnings are the maximum measure of value as far as the market is concerned. Companies report their profits four times a year and investors pours over these numbers --

How do I know whether I gain from the stocks or not?

It is expressed as earnings per share ,EPS (is the value of the share higher or lower than the price/value you initially bought?) higher=gain; lower=loss

Hence, before purchasing the stock, try to gauge a company's present health and future potential before purchasing it.

It is said that the market rewards both fast earnings growth and stable earnings growth.

Stock traders will even pay up for a money-losing company that promises to earn a lot in the future (e.g. 1998's explosion in Internet stocks);

and the things the market will not tolerate are declining earnings or unexplained losses.

Companies that surprise the stock market with bad quarterly reports will almost always get penalized.

Then, what about the Risk?

While history shows that stocks will rise given the fullness of time, however; there are no assurance --

particularly when it comes to individual stocks. Unlike a bond, which promises a payout at the end of a specified period plus interest along the way, the only assured return from a stock is if it appreciates on the open market. (While many companies pay shareholders dividends out of their earnings, they are under no obligation to do so.)

The worst-case scenario is that a company goes bankrupt and the value of your investment evaporates altogether. 

Good news is, that's unlikely and rare to happen as more often, a company will run into short-term problems that depress the price of its stock for what seems an excruciatingly long period of time.

For all the risk, however, there are ways to manage your risk exposure. The best is to diversify (owning a variety of stocks). It's also important to remember that investors are well compensated for rolling the dice with equities.

One final note: Along with ownership, a share of stock gives you the right to vote on management issues. Company executives work at the bidding of shareholders, who are represented by an elected board of directors.

By law, the goal of management is to increase the value of the corporation's equity. If this extent doesn't happen, shareholders can vote/have a say to have management removed.

That's the way it is supposed to work, ideally. As noted above, one of the grim realities of the stock market is that individual investors rarely amass enough stock to be able to exert any tangible influence/authority over a company -- and it is left to big institutional shareholders or groups of company insiders. 

Consequently, it behooves you to carefully research management's competency before you buy a stock. And the best measure of that is reflected on the company's ability to consistently deliver earnings over time.