Investment Basics-Stocks

Last Updated on Sunday, 22 July 2012 16:54
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Shares of stock represent ownership in a corporation. Stocks fall under many categories, depending on the size of the company, its prospects and the state of the markets.

Types of Stocks

Stocks in companies whose sales and/or earnings are growing, or are expected to grow, more rapidly than other companies in the same industry or the economy as a whole, are considered growth stocks.

On the other hand, stocks that may be significantly undervalued (cheap) relative to a variety of fundamental and technical criteria are considered value stocks. In other words, the price of a value stock does not adequately reflect the company's internal strengths or market and economic position.

To determine the total investment return of a stock investment, add the stock's dividend (the amount a company pays out in profits to its shareholders) to its capital appreciation (the gain or loss in the overall price of the investment). Stocks in companies that pay out most of their profits as dividends are called income stocks. Other companies (typically growth stocks) opt to reinvest profits in the business, so returns from these investments will depend on capital appreciation.

Market Capitalization

The size of a company's market capitalization can influence how easily the stock trades, how much information is available on the company and how much risk is involved. To determine a company's market capitalization ("cap"), multiply its current stock price by the number of shares outstanding.

The three sizes of market capitalization for stocks are:

Note: Companies with market capitalization under $300 million are considered microcap, the riskiest group of all.

Stock Categories

Stocks or equity investments can also be classified into five broad categories:

Dow Jones and S&P

The Dow Jones Industrial Average (DJIA) is perhaps the most widely quoted of all the market indicators. It tracks the prices of 30 actively traded large-company stocks on the New York Stock Exchange and generalizes its findings to the market as a whole.

Since the DJIA is based on such a small sample of the market, many investors and analysts pay more attention to Standard & Poor's Composite Index of 500 Stocks (S&P 500). The S&P 500 is a broader, market-weighted index that tracks the stocks of 500 large companies. It should be noted that an investor cannot invest directly in an index.

Market Movement: Bulls and Bears

The stock market rarely proceeds in a straight line. Its movements are more akin to a roller-coaster ride - ups and downs, twists and turns, and the occasional steady course. It's only over longer periods of time that trends become apparent. In addition, the performance of different investment vehicles (stocks, bonds, and cash equivalents) varies over time.

Unfortunately, market volatility cannot be predicted with great accuracy, but there are logical explanations for its occurrence. The origins of market volatility are typically found in the economy, social events, and political activity, here in the U.S. and abroad.

While the past performance of the stock market cannot guarantee future movements, the market has historically moved up and down in recurring cycles. A prolonged period of rising stocks is called a bull market. A market that is steadily falling is labeled a bear market. A complete market cycle can last three to five years or longer.

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