With the variety of investment options available today, it is easy to see how the novice investor could become overwhelmed. Stock, in particular, can cause confusion and uncertainty for the investor as there are vastly different opinions and strategies regarding its investment merits. Before making the decision to include stock as part of an investment strategy, it is important to understand the basics of stock and stock investing.

 

What is stock?

 

In order to raise money to fund its business, a company will sell off shares, or parts of ownership, to the investors. These shares are referred to as stock. By purchasing stock, the shareholder is entitled to profits that the company generates. Since the price of stock is more a representation of the amount that an individual is willing to pay for it than a price set by the company, the price of stock can be in a state of constant fluctuation.

 

What is the stock market?

 

The term “stock market” is sometimes used to refer to the practice of buying and selling, or trading, stock and other securities; it is also commonly used to refer to the physical location in which stocks are traded. The New York Stock Exchange (NYSE) is one of the largest stock exchanges in the world. As a “listed exchange,” only stocks that are registered at the exchange can be traded there.

 

Why invest in stock?

 

The potential profit offered by stock ownership exceeds that of other investment options such as money market funds and bonds. By investing in stock, individuals attempt to achieve a higher rate of return than the rate of inflation. Due to the overall instability of the market and the possibility of large fluctuations in stock prices, investing in stock generally carries more risk than other investment options. Some investment professionals recommend purchasing stock only as part of a balanced portfolio that includes several types of other investments.

 

Main Classifications of Stock

 

• Common stock is the basic type of ownership in a company and is the kind of stock investment typically recommended for the average investor. Common stock ownership entitles the shareholder to vote in corporate matters such as electing the board of directors. A shareholder usually receives one vote per share of stock owned. The primary disadvantage of this type of stock ownership is that common stockholders are paid only after any preferred stockholders receive their dividends.

 

• Preferred stock is a form of ownership not offered by all companies. Preferred stockholders have the distinct advantage of being paid before common stockholders. This payment comes in the form of a fixed dividend that is paid out regularly.

 

How to Purchase Stock

 

The first time investor with little knowledge of the stock market might find it worthwhile to enlist the assistance of an investment professional. Since the majority of these professionals charge commissions, it is necessary to understand all fees up front.

 

Stock can be purchased in the following ways:

 

• Through a full-service brokerage firm. Full service brokerage firms offer a variety of services, including investment advice and research services. This type of brokerage firm typically charges relatively high commissions for their services. Full-service brokerage firms may be best suited for wealthy investors or investors who do not have the time or willingness to conduct the research necessary to be successful.

 

• Through a discount brokerage firm. Discount brokerages buy and sell stock for the individual investor, but generally offer fewer services than a full-service firm. Because fewer services are offered, the commissions are usually much lower. Investors who have some familiarity with the stock market and are comfortable conducting some research on their own may find this option adequate for their investment needs.

 

• Through a financial consultant or other financial professional. Financial consultants often have more varied backgrounds than brokers, with education and experience extending to disciplines such as economics, accounting, and tax. Financial consultants may charge a commission for their services, assess fees based on a percentage of the assets they consult on, or charge fees based on hourly billing rates.

 

• Directly from a company. This type of purchase is referred to as a direct stock purchase plan. While the costs associated with buying and selling the stock directly from a company are relatively low, some companies establish regulations pertaining to a minimum purchase amount. Not all companies offer a direct stock purchase plan; lists of companies that do can be found on various websites such as Wall-Street.com.

 

Factors to Consider Prior to Purchasing Stock

 

• Age: Older individuals and individuals approaching retirement may consider an investment plan in which stock represents a relatively low percentage of the total value of the portfolio. If the market declines in value, older individuals may not have time to recoup their losses.

 

• Risk Tolerance: The amount and type of stock purchased will often depend on the individual’s tolerance for dealing with the possibility of losing money. In general, the more risk one is willing to take, the greater the profit potential; however, there is always the possibility of huge losses.

 

• Time Horizon: While there are differing opinions and strategies, many financial professionals believe that stock is best viewed as a long-term investment plan as the stock market typically rises over longer periods of time. Shareholders who wish to use the stock market for short-term gain should consider a reduced allocation to stocks.

 

Tracking a Stock’s Performance

 

In general, online sources are the easiest way for the average investor to track their stock. Stock prices on the majority of free sites such as NYSE Euronext run on a twenty-minute delay, while sites that offer real-time prices are available for a small monthly fee. Each stock is represented by a ticker symbol, which is a combination of letters used to identify that particular stock, for example, IBM. Additional data provided by these sites typically includes the price per share and the dollar or percentage change since market opening. In addition to using Web sites, the investor may refer to daily newspapers, which often provide stock data covering the previous day’s market activity.

 

Some Final Advice

 

Diversification is an important concept for the stockholder to understand. The diversification of stocks, or purchasing stocks within different companies and different industries, helps to minimize and offset risk. When one company or industry experiences a loss, the total value of the portfolio will not be affected as greatly as if stocks were clustered within one company or industry. A diversification strategy may also involve a balance of domestic and foreign stocks. One method of obtaining diversification is by purchasing shares of a mutual fund--a professionally managed collection of stocks, bonds, money-market instruments, and other securities.

 

 

Questions & Answers

 

Where can I get a list of companies listed on the NYSE?

 

A comprehensive list of companies can be found at NYSE Euronext, which is the official Web site of the New York Stock Exchange. The user can search for and arrange the listed companies in a variety of ways, including alphabetically and geographically.

 

How can I find a brokerage firm in my area?

 

Some of the larger and better-known full-service brokerage firms and wealth management firms such as Merrill Lynch, Smith Barney, Morgan Stanley, and Charles Schwab provide office locations on their Web sites. You can also locate brokerage firms in any information directory or set of yellow pages. Obtaining a recommendation from a trusted friend or family member can be a good idea.