STOCK INVESTING BASICS

What is a Stock
A stock represents the smallest share of a company possible. When you buy a stock you are in effect buying a part of the company whose stock you are buying. Ownership of a company's stock, even a single share, gives you the right to say how the company is run and a slice of the profits the company makes. Since most companies that issue stock are limited liability, ownership does not imply the obligation in case company goes bankrupt etc.


Ownership of a companies stock or shares represents a vote, regularly shareholders will be asked to vote on issues the company is facing. The Profits are distributed either by paying dividends ("slice of the profit") or by share buybacks.



Typically companies issue to stock to raise capital, this capital may be required to expand operations, acquire new companies or property, fund research etc. They are typically issued at par value, however there is usually a premium attached to this value, therefore more often than not you will pay a premium to the par value to own the stock. This premium depends on the perceived growth and outlook of the company.



Stock investors will usually buy stocks if they believe the company has good growth prospects, which in turn would yield bigger profits, thereby increasing both the value of the share and the "slice" of the company profits the company receives. If the company prospers the value of the stock rises and the distribution of profits increases. On the other hand if the company does poorly the value of the share may fall.



Stock Markets
The buying and selling of stocks is conducted on the stock exchanges. To facilitate the buying and selling of their companies stock, the company must list in that exchange. This is to say that if a company is listed on one exchange you cannot buy and sell that stock on a different exchange. Note a company can be listed, in more than one exchange in more than one country. A company must list in order for their stock to be bought or sold.



There are stock exchanges located throughout the world, the major ones being located in the US, UK, Germany, Japan, China, India. Some countries will have more than one exchange, for example in the US you have the New York Stock Exchange and the NASDAQ.



Typically the buying and selling of stocks can only be conducted during the opening hours of the market or exchange in question. In some cases the markets may be open for extended periods. Brokers provide access to the markets. In order to buy or sell any stock it is necessary to open an account with a brokerage firm. It is important to note, it is important to use a good and reputable broker, one that can provide access to a number of exchanges and not just one.



Brokers take orders to buy and sell the stock at a certain price or time, further there are a number of types of orders you can place on the market. These include both orders to buy and sell at certain prices. Brokers will charge you a fee to execute trades. The fee is usually referred to as a commission.



Stock Indices
Stock indices are essentially averages compiled by taking account of the prices by which the stocks listed on the index are trading. They essentially fall into two main categories, first the broad based indices which take into account all the stocks on the exchange, second the selected indices which take into account a selection of selects.



For Example the Dow Jones Industrial Average takes into account 30 of the ?largest? US companies selected to represent the industrial component of the US stock markets. The NYSE composite takes into account all stocks listed on the New York Stock Exchange.



Further there are different ways in calculating these indices the most common being the price-weighted indices, such as the Dow Jones Industrial Average, and the market value weighted indices such as the S&P 500. Price weighted indices essentially assign an equal weight to each company selected, market value weighted indices assign greater weight to larger companies. This is to say that movement in the larger companies stock price have a greater impact on the overall index.



Stock Prices and Quotes
Stock prices and quotes are available from many sources. Newspapers carry summaries of the previous days price action, online sources can provide current prices, there are also a number of television channels that display this information. Although in the case of television channels they will usually show information about the important stocks during the session.



The Stock prices themselves are for the main part determined by perceived performance i.e. to what extent the company is expected to grow. The companies report their financial information quarterly. In many cases they will also report on their outlook for the future. Therefore whenever the companies make announcement that in any way alter the company?s future, investors typically re-adjust their positions to reflect this. Announcements such as these usually have large impacts on the stock prices.