Large cap vs. small cap, blue chip vs. high tech, penny stocks vs. value plays...the list goes on and on. And guess what...all of them fall under the stock investing umbrella!
Unfortunately, there is a lot of BAD information out there and in the end, you're the one that is held responsible. To highlight my point, think about this:
On June 1, 2009:
On July 10, 2009:
The fact remains that many people lost money, because shares of the "old" GM were purchased for something other than $0.00.
As you know from my page on personal balance sheets, stockholders' equity is a company's assets minus its liabilities.
Basically, an investor purchases a share of the financial value remaining after all of the debts are paid.
This is the reason that you hear the terms "equities" and "stocks" used interchangeably.
Investing in stocks provides a shareholder (you) with two aspects of corporate ownership: residual claim and limited liability.
Going back to the GM example, there was not enough money to pay creditors in full (i.e. people who hold corporate debt, bonds, etc.). Since no equity remained, the stock was worth $0.00.
A shareholder of GM stock cannot lose more than the amount they invested in GM. Even though investors that owned GM debt were not fully repaid, they could not get any money from the shareholders.
Investing in stocks can provide returns in two ways: capital gains and dividends.
Or, you short the stock (sell shares and create a "negative" position), the price decreases, and then you buy the stock at a lower price and pocket the difference.
When investing in stocks for capital gains (i.e. a growth investing strategy), the length of time between your buy and sell trades (how long you "own" the stock) will determine how you are taxed (long term verses short term capital gains).
Some companies pay out extra cash dividends toward the end of their fiscal years to improve their financial statements.
If you're investing in stocks for dividends (i.e. an income investing strategy, it is important for you to know how your trading account and/or investment broker handles dividends.
You will usually have the choice of adding the cash to your account balance, or signing-up for a dividend reinvestment plan (called a DRIP) to purchase additional shares of the dividend paying stock automatically.
Safe Investing Tip:
DRIPs are a great way to keep expenses low and preserve capital (See my method for better investing). Any dividend you receive will be automatically reinvested without charging you any commissions or fees.
As stated earlier, common stock represents an ownership stake in the equity of a corporation. It normally provides investors with voting rights, dividends, limited liability, and residual claim.
Unlike common stock, it is typically issued without voting rights ("non-voting" - see below), and pays dividends at constant, contractually specified rates.
The reason some equities are called "preferred" is because dividend payments are made to shareholders of preferred stock before shareholders of common stock.
If preferred dividends are paid and there is no more money left for dividends, owners of common stock will not get dividend payments.
Sometimes, people will say that investing in preferred stock is like bond investments (debt), because shareholders receive a fixed dividend and are ahead of common stock shareholders in the event of bankruptcy.
In the end, preferred stock derives its value from a corporation's equity, and should not be considered a debt instrument.
A company can issue different classes of stock, and each class usually has different voting rights. Each share of voting stock entitles the owner to one vote (or some percentage of one vote) in decisions addressed at the corporation's annual meetings.
Non-voting stock only gives shareholders a share of the financial success of a company (similar to a silent partner). Preferred stock does not usually have voting privileges.
Your broker keeps track of the number of shares you buy and sell (similar to using a ledger). This is one way brokers keep costs low.
However, you can also receive paper copies for the shares that you own.
But stock certificates do make a very unique gift, and look great framed above a desk.