Stocks and Equities | Request More Information |
| Overview | These days, it seems just about everyone knows what a stock is, not to mention having a few favorites they watch. But what exactly is a share of stock? When you buy stock in a company that is publicly traded, you are purchasing ownership shares in that business. As a stockholder, you share the value and the risk of that company. There are two basic types of stock: common and preferred. Common stock is sold initially by a corporation and then traded among investors. Preferred stock frequently pays a higher fixed dividend than common stock and preferred stockholders are given first right to assets/dividends. Common stockholders have voting rights. Preferred stock generally carries no voting rights. |
Stock Exchanges The exchanges do not actually purchase or sell the securities. Specialists match buy and sell orders. In contrast to the NYSE, all trades on the Nasdaq are done electronically. | Stock exchanges act as auction houses. They are places to match buyers and sellers. The exchanges do not actually purchase or sell the securities. Specialists match buy and sell orders. There is only one specialist firm for each stock traded at the exchanges. The two major U.S. stock exchanges are the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX). Stocks listed on the NYSE and AMEX may also be traded on one of the five regional exchanges. In addition, thousands of stocks are traded electronically on the Nasdaq stock market. To be traded on a particular market, companies must meet size and earnings requirements. In contrast to the NYSE, all trades on the Nasdaq are done electronically, so traders do not need to be present on the actual trading floor to execute their trades. The Nasdaq uses market makers (private firms) that compete with one another by posting bid and ask prices. Also in contrast to the NYSE where there is one specialist per security, at the Nasdaq there may be many market makers in one stock and they actually buy and sell shares from investors. Stocks in many small and new companies are traded at the OTC (over-the-counter) market. OTC prices are quoted on an electronic listing system, the OTC Bulletin Board. |
High Participation Levels Thanks to the Internet, it is easier and cheaper than it has ever been to do your own research and make your own decisions. | More people than ever are invested in the stock market today, through their own accounts, mutual funds they hold through work, or retirement plan investments. In fact, the increasing flow of money into self-funded retirement plans, and the resulting stampede to invest that money for the highest long-term returns in the public markets, is a key reason for the very high returns we have seen in recent years. Thanks to the Internet, it is also easier and cheaper than it has ever been to do your own research and make your own decisions. The question is whether you have the time and energy to devote to the task, and whether you are emotionally strong enough to live with the possibility of losing a good bit of money from time to time. Those who don't think they want to invest in individual stocks can invest in a basket of stocks through buying mutual funds or hire a professional money manager to make all their investment decisions. |
Why Invest in Stocks? | Most investment professionals consider stocks a great way to build value over the long term. In most years they have beaten the rate of inflation, often by wide margins. On average over the last 50 years, stocks have enjoyed 14% returns, far better than bonds or conservative money market accounts. Stocks have much more short-term risk, however; the value of your holdings may be quite volatile or fall substantially at any time. The 1990's, and the last five years in particular, have been unusually great years to be invested in large blue chip companies and high growth high technology companies. In fact, in 1999 the tech-heavy Nasdaq market index set a record by rising 88%! This is unlikely to ever be repeated, and as all stock professionals like to say, past performance is not always a good indicator of future returns. You can invest in stocks yourself or hand off decisions to a professional manager. There are pros and cons to each approach: Self-managed brokerage accounts: here you can make your own decisions on what to buy and sell. This can be exhilarating and fun for you, or nerve-racking and time consuming, depending on your personality. You may also be tempted to buy and sell on emotion and poor information. Research is important. The commissions you pay depend on what type of broker you use:
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