Common stocks, also known as equities, represent a unit of ownership in a publicly traded corporation. Each share of stock comes with certain rights such as a vote at the annual meeting on important corporation matters. Because you are an owner of the corporation, it is important that you pay attention to the financial and market news concerning the company you own.
This book focuses on investing in individual stocks as one part of a complete investment program. Your investment program should consist of stocks, bonds, and cash. This focus on stocks will allow you the tools to identify great companies. But you can also own stocks through investment vehicles other than individual ownership. The most common ways are through mutual funds and exchange traded funds. It is likely that many of you will own both individual stocks and stocks through mutual funds or exchange traded funds.
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STOCK TIP |
The stock market, or markets as they are collectively known, price stocks on a daily basis. The markets, which are mostly electronic, match buyers and sellers, theoretically creating an efficient process that prices equities correctly. Stock prices are determined by the forces of supply and demand in the market on a daily basis. However, the price of stock is strongly correlated to its value as an ongoing business. Even though other factors such as economic news may affect stock prices on a daily basis, the price will generally reflect how the market values the company.
Companies that show superior economic performance command the highest stock prices over the long term. However, the stock market is not always right. Clever investors will spot companies that are undervalued (underpriced) and take advantage of the opportunity to buy with the faith that at some point the markets will correctly value the stock and the investor will profit.
Common stock carries with it some rights and privileges that are important to individual investors. You have a right to vote at the annual meeting either in person or by mail and you have a right to bring issues before the annual meeting that concern you about the company or company policies. In truth, only large investors (usually mutual funds, insurance companies, pension funds, and others that own millions of shares) are really listened to at annual meetings, although by law every stockholder has certain rights to bring issues before the meeting that the company cannot deny. However, if you own stock in a company that is having an annual meeting nearby, I encourage you to attend just to see how they are run. Actually getting into the meeting is usually not as simple as showing up, so investigate what type of credentials you will need.
Some companies pay a portion of their profits to stockholders in the form of dividends. While not all companies pay dividends, those that do are often attractive investments especially for individuals in need of current income, such as retirees.
The decision to pay a dividend and the amount is up to the board of directors. Dividends are usually paid on a quarterly basis and may be increased, decreased, or eliminated by the board of directors as it sees fit.
Preferred stock trades separately from common stock. However, the real value of owning preferred shares is that they receive preferential treatment for dividends. In fact, about the only reason to own preferred shares is for the dividend. Some industries such as utilities, for example, are known for paying consistent and strong dividends.
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DEFINITION |