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Stock Market Basics

Oct 27, 2007
Your investments are critical to your financial security. You can not rely upon a pension or federal assistance for an income after your retire. Also, job security is not guaranteed, and unless you want to work until you are 80 years old, you need to need to know something about stocks and financial planning. For the purposes of this discussion, we will outline for you some general information about stocks so that five minutes from now, you will be familiar with everything you need to know to get started with investing.

Stocks are known as equities because a share of stock is a certificate of ownership in a corporation. It is also a claim on the earnings of the corporation. Companies pay out a percentage of their earnings to shareholders in the form of a dividend.

There are two different types of stock: common stock and preferred stock. Common stock represents ownership in a corporation. Holders of this type of security exercise control by electing a board of directors and voting on company policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a the assets of a company only after bondholders, preferred shareholders and other debtholders have been paid in full. Preferred stock has a higher claim on the assets and earnings than common stock. Preferred stock has a dividend that must be paid out before dividends to common stockholders, but preferred stock often has no voting rights attached to it.

Stocks trade on an exchange. The largest exchanges where the premier stocks trade are the New York Stock Exchange, American Stock Exchange, and the NASDAQ. Within an exchange, there is the primary and secondary market. The primary market is for the initial sale of shares in a company for the first time to the public, as with an IPO. The secondary market is for the trading of shares between individual investors.

Now that you understand the basics, you need to learn how to purchase a stock. When you buy or sell a stock, you must place the order through a broker, who then transacts your business by placing the order on the market. Stockbrokers are basically salespeople. They work for brokerage houses. You have heard the names Merrill Lynch, Solomon Smith Barney, Goldman Sachs. Those are brokerage houses. Brokers work at those companies. Some brokers are paid a straight salary, some are paid a commission, and some receive a base salary in addition to their commission.

A full-service broker advises you on which stocks to buy. Full service brokers are financial advisors; they tell you what to do. However, full-service brokers do not always provide the best advice. Most of the advice they provide is based on research done by analysts who work for the brokerage house.

A discount broker is someone who gives you zero advice, and just executes your market orders for you, but does nothing else. Therefore, a discount broker usually does not collect commissions. Instead, they usually charge a flat annual fee and are paid a salary. Internet brokers such as Etrade or Ameritrade are discount brokers that work on commission. They allow you to place your market orders online, and the website itself is the broker. Internet brokers usually charge a much smaller commission than anyone else.

A full-service broker offers a wider array of investment vehicles for you to put your money into, such as stocks, bonds, derivatives, annuities, and some also sell life insurance. A discount broker, on the other hand, does not have access to all these investment vehicles. A discount broker makes money by opening up a lot of accounts and having a lot of customers, but a full-service broker makes money by placing a lot of trades within your account, because they receive a commission on each trade.

This is where you need to be careful. Full-service brokers make money every single time you place a trade. So, they have an incentive to persuade you to place a lot of trades, because they make more money that way. Some full-service brokers do provide excellent investment advice, but are so active with your portfolio that their commissions start to eat away at your earnings. Neophyte investors have unknowingly hired brokers that have hoodwinked them, and when they get their annual statement they are surprised to find that they made a lot less than what they thought, and in some cases actually got a negative return on their investments. So, be careful.

I hope this information has helped you understand some of the basics about stocks and the stock market in general. Try to set aside some money for investing and start while you are still young. The earlier you begin, the more money you can make down the line. Review your statement every month to make sure that your broker is not throwing your money away on pointless trades in order to make more commissions. Also, carefully review the performance of the stocks in which you are invested, and you should do fine.
About the Author
Jim Pretin is the owner of http://www.forms4free.com, a service that helps programmers make free HTML forms.
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