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basic knowledeg of stock

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  • henry
    253主题 254帖数

    级别：会计员

    发表于：2007-03-01 14:01:00

    I

    Introduction

    Stock (business), in business and finance, a share of ownership in a corporation. Shares in a corporation can be bought and sold, usually on a public stock exchange. Consequently, the owner of shares can realize a profit or capital gain if the stock is sold at a price above what the owner originally paid for it.

    Some companies enable stockholders to share in the profits of the company. These payments of corporate profits to stockholders are called dividends. In addition to having a claim on company profits, stockholders are entitled to share in the sale of the company if it is dissolved. They may also vote in person or by proxy on a variety of corporate matters, including the most important matter of who should run the corporation. When the company issues new stock, stockholders have priority to buy a certain number of shares before they are offered for public sale. Stockholders also receive periodic reports, usually quarterly, that provide information regarding the corporation’s business performance. Stocks generally are negotiable, which means stockholders have the right to assign or transfer their shares to another individual.

    A stockholder is considered a business owner and has the protection of limited liability under United States laws. Limited liability means that a stockholder is not personally liable for the debts of the corporation. The most a stockholder can lose if the company fails is the amount of his or her investment—what he or she originally paid for the stock. This arrangement differs from that of other forms of business organization, which are known as sole proprietorships and partnerships. These business owners are personally liable for the debts of their businesses.

    II

    Why Corporations Issue Stock

    Corporations issue stock in order to finance their business activities. This method of raising funds is only available to business firms organized as corporations; it is not available to sole proprietorships and partnerships. The corporation can use the proceeds of a stock offering in a variety of ways. Depending on the type of company, this might involve increasing research and development operations, purchasing new equipment, opening new facilities or improving old ones, or hiring new employees.

    An alternative to stock financing is debt financing or the sale of bonds, an interest-bearing loan. This alternative is also available to sole proprietorships and partnerships. With the issuance of a bond a company typically promises to make periodic interest payments to the lender or bondholder as well as pay back the amount of the bond when the term of the bond expires. Thus bonds are evidence of loans while stocks are evidence of ownership. Stocks and bonds are collectively known as securities.

    When a corporation first makes stock available for public purchase, it works with an investment banking firm to arrange an initial public offering (IPO). The investment bank acquires the first issue of stocks from the corporation at a negotiated price, and then makes the shares available for sale to its clients and other investors. Corporations that have IPOs are usually young companies in need of large amounts of capital.

    A corporation can only have one IPO—the first time it makes stock available to the public. After its IPO, a company is said to be public. Public corporations that need additional financing for further business development may choose to issue more stock at a later time. This is called a subsequent, or follow-on, offering.

    Some corporations may choose not to go public. In this case it is said to be a privately held corporation. A corporation may elect to remain private because it does not want to share its profits, or it may not want to relinquish control to shareholders.

    Most of the information reported in the daily news media about the buying and selling of stock refers to transactions involving previously issued stock. The daily buying and selling of stock rarely involves IPOs. Almost all stock transactions are “second-hand transactions.” The corporation that initially issued the stock is not directly involved.

    A corporation’s capitalized value refers to the market value of the stock that it has issued and that remains outstanding—that is, available for sale or purchase. A corporation’s capitalized value may be greater or less than its book value. Book value is the value of the corporation’s assets as reflected in its accounting statements—that is, on its books. Capitalized value may also be greater or less than the corporation’s replacement value, the amount that it would take to replace all of the corporation’s assets.

    Corporations will sometimes split their stock. This means the corporation replaces outstanding shares with new shares on some multiple basis, such as a two-for-one or three-for-one split. When a corporation splits its stock, it does not obtain any new funding. Splits usually occur when the market price of shares is deemed too high by corporate management. With a split the price of shares falls, making purchase by smaller investors more affordable. Keeping a stock relatively affordable for smaller investors makes it easier for a corporation to raise money with a follow-on stock offering.

    III

    Why People Buy Stock

    Economic gain represents the primary motive for the purchase of stock. The gain or return from stock consists of two parts: dividends, the periodic payments made from profits, and appreciation, the capital gain realized from selling a stock for more than its purchase price.

    An investor really has only two choices in acquiring the financial assets of a corporation—buying stocks or bonds. As a financial claim against a company, bonds take precedence over all types of stock. Thus, they are a safer investment than stocks, especially in times of deflation (a period when the prices of goods and services are generally falling). Stocks, however, are usually the better investment during periods of inflation (a period when the prices of goods and services are generally rising) because they represent ownership of assets that will probably rise in value as fast as or faster than prices in general. Because the dollar value of bonds is fixed, they cannot serve as a hedge or protection against inflation as do common stocks. See also Inflation and Deflation.

    IV

    The Language of Stocks

    People who invest in stocks or follow the progress of the stock market encounter a wide variety of terms unique to these investments. These terms include price-to-earnings ratio, earnings per share, market capitalization, mutual fund, bull market, bear market, and day trading, among others. Understanding this vocabulary helps explain many of the workings of the market in stocks.
    A

    Price-to-Earnings Ratio and Earnings Per Share

    Investors use several techniques to determine whether a particular stock should be purchased. Some investors examine a stock’s fundamentals such as its earnings per share or its price-to-earnings ratio. Earnings per share is calculated by dividing the corporation’s total earnings or income by the number of shares the corporation has outstanding. A corporation’s price-earnings ratio is calculated by dividing the current price of a share of the company’s stock by its earnings per share. These calculations represent fundamentals in the sense that they reflect the effectiveness of a company’s business operation (earnings per share) and the market’s current assessment of the company’s worth in relation to its earnings (price-earnings ratio).

    In making a decision to buy or sell a particular stock, expectations are formed regarding future fundamentals. If expectations about the corporation’s operations improve and investors expect higher earnings per share, then the price of the stock is likely to rise. Investors expect that more people will want to buy shares to participate in the increased profitability. If, however, expectations turn pessimistic and shareholders anticipate lower earnings per share, then holders of the stock will try to sell their shares, reducing the stock’s price.

    B

    Mutual Fund

    Investors can own stock in two different ways. The first is direct ownership, in which investors add a corporation’s stock to their personal portfolio or account. The second type of ownership is indirect and involves participation in a mutual fund. A mutual fund is operated by a management-investment company that combines the money of its shareholders and invests that money in a wide variety of stocks. A mutual fund is thought to be safer because it is diversified. Diversification means that shareholders are less likely to lose their investment because the risk is spread among the stocks of many corporations rather than just a few. Investors add the stock of the mutual fund to their personal accounts. However, the mutual fund has direct ownership of the corporations’ stocks.

    C

    Bull Market, Bear Market

    Bull market is a term applied to a period when stock prices on average experience a sustained increase. During a bull market investors are optimistic about future business conditions and expect corporate profits to rise. So they will want to acquire stock to participate in the expected higher profits. A bear market describes the opposite situation, when stock prices on average experience a sustained decrease. Pessimism regarding the economic future dominates investor thinking during a bear market.

    The most recent bull market extended from 1990 to early 2000 when the market value of the outstanding shares of domestically issued stock rose from $3.5 trillion to $19.6 trillion. During the bear market that followed, the market value of these stocks fell from their high point to $13.3 trillion as of mid-2002.

    D

    Dealers and Brokers

    Investors typically employ the services of dealers and brokers to execute the purchase and sale of securities. Some of these brokers are considered full-service brokers. Full-service brokers provide a wide variety of services for the investor, including the provision of investment advice. Other firms are considered discount brokers. Discount brokers basically provide the single service of executing the buy and sell orders of investors. For mutual fund transactions the investor can deal directly with the mutual fund. Thus, the investor need not use the services of a broker or a dealer for these types of transactions. Even in these instances, however, an investor may seek the advice of a financial adviser to determine which mutual fund to buy or whether to sell fund shares.

    E

    Day Traders

    Some investors are known as day traders. These are individuals who sit at computer terminals continuously monitoring stock prices for profit opportunities. They typically own stocks for very short periods of time, usually for less than a day. Day trading became popular with the development of computer technology and with the bull market of the 1990s. But day trading became significantly less popular with the advent of the bear market in 2000.

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