What is a Stock?

A stock is an investment product that represents partial ownership of a company or corporation. The stock market repr

Let's say you have a hot dog stand. The stand is selling more hot dogs than you can make. So you need money. You sell your friends a part of the hot dog stand to get the money you need to expand. You have just sold them stock in your hot dog stand.

Thousands of companies in the United States, known as public companies, invite you to become part owners. They do this by selling shares of the company. When an investor buys a share of a company, he or she receives a stock certificate or additional documentation that proves stock ownership. If stock shares are purchased through a brokerage firm, the broker holds the stocks in "street name", which means the brokerage firm maintains the paper-work that proves stock ownership.

It has been said that when it comes to ownership, a public company is the most democratic institution in the world. It is an example of true opportunity. Investing in public companies is the way many people can participate in the growth an prosperity of a company. Selling stock also benefits the company. When a company sells shares, it uses the money to open new stores, build new factories, or upgrade its merchandise so it can sell more products to more customers and increase its profits. As the company becomes larger and more prosperous, its shares become more valuable. There is no guarantee, however, that a publicly-traded company will be successful. A company with a great deal of money raised from the public can suffer serious setbacks or even be forced to close its doors because of a variety of factors.

There are baically two types of stock: common and preferred.

When an investors own a public company's common stock, they are entitled to vote in the election of company officers as well as other important matters, and they often receive dividends on their shares. Since common stock is often riskier than preferred stock, it offers greater potential returns an losses.

Shareholders of preferred stock would not usually have voting rights, but would receive a fixed dividend, or share of a compan's profits, which is paid to preferred stockholders before common stockholders are paid. However, owners of preferred stock pay for that privilege-usually their dividends would't increase when the company's profits increase. When a company does well, the price of its preferred stockholders recoup their investment before common stockholders.

The stock price is the amount an investor pays for one share of a public company's stock at a given moment. Outside events can make a company's share price rise of fall. Other forces that ca affect stock prices include interes rates, national and international issues or events, foreign exchange rates, financial forecasts, and new technologies. Retail stocks are subject to declines during recessions.

Dividends are the distribution of a compan's profit or earnings to the company's shareholders or stockholders-the people and firms that have purchased that company's stock. Dividends are another way that you can share in a compan's growth; they are usually distributed quarterly. Most companies offer a dividend reinvestment plan, which means that instead of paying you by check or depositing the money into your account, the amount of the dividend is used to buy more shares of the company's stocin your name. This is a good way to increase your investment in the company over time.

The terms large-cap, mid-cap, and small-cap refer to the issuing compan's market capitalization, that is, the overall value of all shares of the company's stock.

Growth stocks are shares of companies exhibiting relatively fast growth in earnings, which generally causes the stock price to go up. Be certain you understand that growth stocks are the most volatile and can fluctuate rapidly because growth companies are typically in new, or fast growing, industries such as the high-tech sector. Growth stocks are considered riskier and ofter pay lower or no dividends, but appeal to investors who will accept more volatility and risk in hopes of greater appreciation in share price over time.

Income stocks, on the other hand, are characterized as those that would apy high and regular dividends. Stable and well-established industries, including utilities and financial institutions, typically produce income stocks.

Blue chip is the name applied to the stock of large, well-known, well-established companies with good reputations.

Value stocks are those considered to be selling at lower prices or "undervalued" because the companies that issue these shares have had business setbacks or are out of favor with investors. Value stocks have been known to outperform growth stocks in slow markets-and vice versa. But there is still a risk with value stocks because not all companies recover from setbacks.

You can learn more about investing in individual stocks by visiting such Web sites as Valueline http://www.valueline.com and the Motley Fool http://www.fool.com . Remember to always make up your own mind about investing based on what makes sense to you-not solely on the opinion of someone else.

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