BindalFX 4x4u.net        Online Trading    
 

Stocks

A stock represents a share in the ownership of a company. As the number of stock increases, the share in the ownership also increases proportionately. Stocks are some times referred to as equity or shares. The owner of the stock is commonly referred to as the share holder. A stock in a company is represented by a stock certificate which is proof of ownership of the stock. These days the stock certificate is in the electronic format. Each stock has one vote in the election of the board of directors of the company at the annual meeting.

A share holder is entitled to a portion of the company’s profits and has a claim on the assets of the company. Profits are paid out in the form of dividends. If the company is goes into liquidation, the share holder will receive a proportionate share of what is left after all the creditors have been paid. A share holder is not personally liable for the debts of the company. Even if the company goes bankrupt, the share holder will not lose his personal assets. The maximum value the stock holder can lose is the value of his investment.

Companies issue stocks to raise money. When a company issues stocks, it actually sells part of the company. Issuing stock is called equity financing. The first sale of stocks by a company is called the initial public offering. By issuing stocks, the company is able to raise money but does not have to pay back the money or make interest payments. It is the discretion of the company management to pay out the dividends. Merely because the company makes a profit in a year, it does not mean that the company has to pay out dividends. There is no obligation to pay out dividends.

Companies sell two kinds of stocks – common and preferred. The main differences between the two are:

Common Stock Preferred Stock
 Owners of commons stock may receive dividends. Dividends are paid to common shareholders after interest is first paid on all debts and dividends are paid to preferred shareholders. If the company is liquidated (goes broke) creditors, bondholders, and preferred shareholders all must be paid before any remaining money is distributed to common shareholders. There are four main categories of common stock:
(i) Blue-chip stocks - Stocks issued by well-established corporations with many years of proven success, earnings growth, and consistent dividend payments. They are relatively high priced, offer a relatively low-income yield and are a relatively safe investment.
(ii) Income stocks - They pay a higher-than-average return on investment and are generally issued by corporations in stable businesses that have no need to reinvest a large percentage of profits each year.
(iii) Growth stocks – They are issued by corporations expected to grow rapidly during the coming years and have a current income that is often low, since the company plows back most of its earnings into research and expansion. Their value may rise quickly if the company performs up to expectations.
(iv) Speculative stocks – They are stocks are backed by no proven corporate track record or lengthy dividend history and usually issued by little-known or newly formed corporations, There is a possibility of tremendous profit—but a substantial risk of losing all as well.		  Owners of preferred stock receive their dividends after interest on debt, but before dividends are paid to common stockholders. In liquidation, creditors are paid first, then preferred shareholders are paid and common shareholders are paid last. Preferred stock dividends are generally paid at a fixed rate similar to interest on a bond or a certificate of deposit. Although the rate is fixed, preferred dividends may be decreased or omitted at the discretion of the company's board of directors Should the directors not pay the full dividend, the omitted dividends are recorded and must be made up before any common stock dividend may be paid.
 The value of the stock increases with increased value of the company.  The value of the stock increases with the increased value of the company, but the growth is moderate when compared to common stock.
 Owners have the right to vote at shareholder meetings in person or absentee using a proxy.  Most companies do not grant any voting rights to preferred share holders.


Individuals, corporations, banks, insurance companies, mutual funds and securities firms invest in stocks. Stocks are traded at the stock exchanges in marketplaces known as stock exchanges. The exchange itself does not buy or sell stock, nor does it set the price of stock; the exchange is simply a forum in which individuals and institutions may trade in stocks, where buyers and sellers meet and decide on the price. Most of the trading is done through computer terminal. But there are some exchanges where transactions are carried out on a trading floor. The stock exchange facilitates the exchange of stock between buyers and sellers. For a stock to be traded on the trading floor, the stock must be listed on that exchange. Only companies listed on a public exchange have shares that can be bought and sold on the open market.
The major stock exchanges in the US are The New York Stock Exchange (NYSE) founded in 1792 and the NASDAQ. While the NYSE still has a trading floor where stock trading is done physically – face to face, at NASDAQ, trading is done through a computer and telecommunications network of dealers.

There are two basic methods which the exchanges use for trading: on the trading floor and electronically.

In an exchange like the NYSE which uses the trading floor, the person who wants to buy the shares of a company will place an order with his broker to buy or sell x number of shares of that company. The order may take any of following forms:

• Round-lot order - An order to buy or sell 100 shares, considered the standard trading unit
• Odd-lot order - An order to buy or sell fewer than 100 shares
• Market order - An order to buy or sell at the best available price
• Limit order - An order to buy or sell at a specified price
• Stop order - An order designated to protect profits or limit losses by calling for sale of the stock when its price falls to a specified level
• Good till canceled order - An order that remains open until it is executed or canceled by the investor

The broker will send the order to his floor clerk on the exchange who alerts one of the floor trader of the broker who will find another floor trader willing to sell or sell x number of shares of that company. The floor traders know which floor trader deals in the stocks of which company. The two floor traders agree on the price and complete the deal. The information is passed back to the broker who informs the person about the deal.

In NASDAQ and other exchanges which trade electronically, vast computer networks are used to match buyers and sellers.

As they must be traded on a stock exchange, an individual investor must use the services of a broker to make the transaction for him. Brokers take orders to buy or sell a certain stock. The order may include instructions to trade at a certain price or simply what the market will bear. They charge a small commission for the sale. When the broker receives an order he will try to execute it by finding a buyer or seller as the case may be. The buyer or seller will also represented by a broker and each broker receives a commission on the sale.

Most people invest in stocks because they believe or are led to believe that the company whose stock they buy will grow and therefore the value of the stock will rise. Because stocks represent ownership in a company they give the holder rights to participate in major decisions of the company. Every share represents one vote and shareholders are regularly asked to vote on important matters.

Stocks have the potential for delivering very large gains. Annual returns-on-investment of over 100% have occurred on a somewhat regular basis. Stocks have always out performed investments such as bonds and savings account as the risk involved in investment in stocks is greater. People invest in stocks to make more money. While saving is a passive activity focused more on safety, investing in stocks is focused on returns and involves risk that can run the spectrum from conservative to very aggressive.  As the value of the company increases, the stock price increases. If the profits increase, the dividends will also increase.

There are other reasons why people prefer to trade in stock. The rate of commission payable to the broker for each transaction is very low. The stocks can be easily safe guarded. The transaction is quick. The market is transparent – the market price of a stock can be easily and quickly determined. Most stocks are very liquid and can be bought and sold quickly at a fair price.

Stocks offer limited legal liability. Stockholders who take no active part in the running of the company are protected against any liability stemming from the company’s actions beyond their financial investment in the company.

Stocks pay out in two ways. Cost companies declare the dividend to be paid annually but actually make their distributions on a quarterly basis. Most profitable companies share their profits with the shareholders by paying them a cash dividend. Although the pay out dividend is the discretion of the company, companies generally try to maintain a fairly even flow of them. Dividends increase with increase in net earnings and reduce when the earnings dip. Stocks also pay out in the form of capital gains. A stock purchased at a given price can be subsequently sold at a higher price resulting in a capital gain to the seller. The value of stock increases with the growth of the company. Many people buy stocks of companies what they feel will grow in anticipation that the value of their stock will increase over time as the company grows and prospers. 

The most that a share holder can lose is the price he pays for the stock. However there is no limit to the profit potential of investing in stocks. Despite the ups and downs, over the last sixty years stocks have generally appreciated. Stocks are a good way to beat the inflation.  Bonds and bank deposits tend to be safer investments but they are off set by the higher return potential of stocks. The average long term return from investing in stocks is 10-12%. The creation of IRA and 401k plans, superannuation etc has helped increase the popularity of investing in stocks. These plans have immediate or long term tax advantages. The investment in 401k plan is not included in taxable wages and no taxes are due on any interest or growth within the 401k plan until the money is taken out. 

The internet has contributed to making the investment in stocks easier and convenient. Today stock trading can be done online. The physical visits to the broker can be avoided.
Stocks offer a great opportunity for long term growth plans and can provide an income flow through dividend. Stocks also have tax advantages. A stock owned outside of a retirement plan or IRA form more than twelve months is sold, the sale profit is taxed on the federal level as long term capital gains and not at the higher federal ordinary income tax rate.

Stock holders are the last to get paid, like all other owners. A company must first pay its employees, suppliers, creditors, maintain its facilities and pay its taxes. Any money left can then be distributed among its owners. Although they are the owners, they do not enjoy all of the rights and privileges that the owners of privately held companies do. Stock prices tend to be volatile. Prices can be erratic, rising and declining quickly. Stock values can sometimes change for no apparent reason.

For even more information visit:  http://en.wikipedia.org/wiki/Stock

 

 

Move on to Step 3 - Module 1 > Market Basics: Forex

 

  

____Step_1____
Welcome
Binding Agreement
____Step_2____
Your Trading Business
□ Trading Styles
□ Objectives
□ Business Resources
□ Business Assets & Liabilities
____Step_3____
Market Basics
□ Stocks
□ Forex
□ Futures
□ Options
□ CFDs
Trading Basics
□ Reading Price Charts
□ Types of Markets
□ Types of Trading
□ Placing Orders
____Step_4____
Charting Basics
□ Pivot Points
□ Trend Points
□ Isolation Points
□ Real Bars
□ Summary & Test
□ Answers
Trading System Builder Tool Kit
□ Trading Rules
□ -1 Trend
□ _Moving Averages
□ _MACD
□ _Trend Lines & Channels
□ -2 Trigger
□ _Moving Averages
□ _MACD
□ _Stochastic
□ _RSI
□ _Bollinger Bands
□ _Fibonacci
□ _Support & Resistance
□ _Trend Lines
□ _Divergence
□ _Volume
□ _Price Bar Patterns
□ _Breakouts
□ _Which Triggers To Use
□ -3 Trade
□ -4 Terminate
□ _Initial Stop Loss
□ _Exit Strategy
□ -Filters
____Step_5____
Risk Management
Back Testing & Evaluation
Running The Business
Additional Tools & Resources
Resources