What is a share ?

In finance a share is a unit of account for various financial instruments including stocks, mutual funds,
limited partnerships, and REIT's. In British English, the usage of the word share alone to refer solely to
stocks is so common that it almost replaces the word stock itself.

In simple Words, a share or stock is a document issued by a company, which entitles its holder to be
one of the owners of the company. A share is issued by a company or can be purchased from the stock
market.

By owning a share you can earn a portion and selling shares you get capital gain. So, your return is the
dividend plus the capital gain. However, you also run a risk of making a capital loss if you have sold the
share at a price below your buying price.

A company's stock price reflects what investors think about the stock, not necessarily what the
company is "worth." For example, companies that are growing quickly often trade at a higher price than
the company might currently be "worth." Stock prices are also affected by all forms of company and
market news. Publicly traded companies are required to report quarterly on their financial status and
earnings. Market forces and general investor opinions can also affect share price.

Quick Facts on Stocks and Shares

 Owning a stock or a share means you are a partial owner of the company, and you get voting
rights in certain company issues
 Over the long run, stocks have historically averaged about 10% annual returns However, stocks
offer no
guarantee of any returns and can lose value, even in the long run
 Investments in stocks can generate returns through dividends, even if the price

How does one trade in shares ?

Every transaction in the stock exchange is carried out through licensed members called brokers.

To trade in shares, you have to approach a broker However, since most stock exchange brokers deal in
very high volumes, they generally do not entertain small investors. These brokers have a network of
sub-brokers who provide them with orders.

The general investors should identify a sub-broker for regular trading in shares and palce his
order for purchase and sale through the sub-broker. The sub/broker will transmit the order to his
broker who will then execute it .

Share Market Basics - Explained

Demat Account Definition

Demat refers to a dematerialised account.

Though the company is under obligation to offer the securities in both physical and demat mode, you have
the choice to receive the securities in either mode.
If you wish to have securities in demat mode, you need to indicate the name of the depository and
also of the depository participant with whom you have depository account in your application.

It is, however desirable that you hold securities in demat form as physical securities carry the risk
of being fake, forged or stolen.

Just as you have to open an account with a bank if you want to save your money, make cheque
payments etc, Nowadays, you need to open a demat account if you want to buy or sell stocks.

HOW TO OPEN A DEMAT ACCOUNT ?

Opening an individual Demat account is a two-step process: You approach a

DP and fill up the Demat account-opening booklet. The Web sites of the NSDL and the CDSL
list the approved DPs. You will then receive an account number and a DP ID number for the
account. Quote both the numbers in all future correspondence with your DPs.

So it is just like a bank account where actual money is replaced by shares. You have to approach the
DPs (remember, they are like bank branches), to open your demat account. Let's say your portfolio
of shares looks like this: 150 of Infosys, 50 of Wipro, 200 of HLL and 100 of ACC. All these will show in
your demat account. So you don't have to possess any physical certificates showing that you own
these shares. They are all held electronically in your account. As you buy and sell the shares,
they are adjusted in your account. Just like a bank passbook or statement, the DP will provide you
with periodic statements of holdings and transactions.

Is a demat account a must? Nowadays, practically all trades have to be settled in dematerialised
form. Although the market regulator, the Securities and Exchange Board of India (SEBI), has allowed
trades of upto 500 shares to be settled in physical form, nobody wants physical shares any more.

So a demat account is a must for trading and investing.

Most banks are also DP participants, as are many brokers.

You can choose your very own DP.

To get a list, visit the NSDL and CDSL websites and see who the registered DPs are.

A broker is separate from a DP. A broker is a member of the stock exchange, who buys and sells shares on
his behalf and on behalf of his clients.

A DP will just give you an account to hold those shares.

You do not have to take the same DP that your broker takes. You can choose your own.

Banks are also advantageous because of the number of branches they have. Some
banks give the option of opening a Demat account in any branch, while others restrict
themselves to a selected set of branches.

Some private banks also provide online access to the Demat account. So, you can check on
your holdings, transactions and status of requests through the net banking facility. A broker
who acts as a DP may not be able to provide these services.

DEMAT ACCOUNT OPENING COST AND OTHER CHARGES

The cost of opening and holding a Demat account. There are four major charges usually levied on a
Demat account: Account opening fee, annual maintenance fee, custodian fee and transaction fee. All
the charges vary from DP to DP.

Depending on the DP, there may or may not be an opening account fee. Private banks, such as ICICI
Bank, HDFC bank and UTI bank, do not have it. However, players such as Karvy Consultants and the
State Bank of India charge it. But most players levy this when you re-open a Demat account, though
the Stock Holding Corporation offers a lifetime account opening fee, which allows you to hold on to
your Demat account over a long period. This fee is refundable.

Annual maintenance fee: This is also known as folio maintenance charges, and is generally levied in
advance.

Custodian fee: This fee is charged monthly and depends on the number of securities (international
securities identification numbers – ISIN) held in the account. It generally ranges between Rs. 0.5 to
Rs. 1 per ISIN per month.

DPs will not charge custody fee for ISIN on which the companies have paid one-time custody charges
to the depository.

Transaction fee: The transaction fee is charged for crediting/debiting securities to and from the
account on a monthly basis. While some DPs, such as SBI, charge a flat fee per transaction, HDFC
Bank and ICICI Bank peg the fee to he transaction value, subject to a minimum amount.

The fee also differs based on the kind of transaction (buying or selling). Some DPs charge only for
debiting the securities while others charge for both. The DPs also charge if your instruction to buy/sell
fails or is rejected.

In addition, service tax is also charged by the DPs.

A stock option is a specific type of option with a stock as the underlying instrument (the security that the
value of the option is based on). Thus it is a contract to buy (known as a "call" contract) or sell (known as
a "put" contract) shares of stock, at a predetermined or calculable (from a formula in the contract) price.

It is Having the Rights to purchase a corporation's stock at a

  specified price.

Infact There are two definitions of stock options.

1. The right to purchase or sell a stock at a specified price within a stated period. Options are a popular
investment medium, offering an opportunity to hedge positions in other securities, to speculate on stocks
with relatively little investment, and to capitalize on changes in the market value of options contracts
themselves through a variety of options strategies.

2. A widely used form of employee incentive and compensation.In some Companies, Stock options
constitute part of remuneration.

Employee stock options are stock options for the company's own stock that are often offered to upper-
level employees as part of the executive compensation package. An employee stock option is identical to
a call option on the company's stock, with some extra restrictions.

Performance Stock Options are Options that vest if pre-determined performance measures are
achieved. The performance goal (revenue growth, stock-price increases…) must be reached for the
options to be exercisable or for the vesting to be accelerated

Online Stock Trading is a recent way of buying and selling stocks. Now you can buy and sell any stock
over the Internet for a low price and you don’t need to call up a broker.

You can buy any stock and sell any stock and it doesn’t take much to get started.

All you need is a brokerage account. A broker that I use is Scottrade http://www.scottrade.com/ and you
can start an account with them for $500 and their commissions are only $7, so they are not expensive at
all.

Once you have setup a brokerage account you then need to choose an investment method and then
research different companies and then buy stock in the ones that you feel will go up because they are
good sound companies.

So as you can see there are several benefits to online stock trading but let’s recap.

With online stock trading all you need is $500 to open a brokerage account, the brokerage commissions
are low at Scottrade they’re only $7 and you can buy and sell your stocks from your home computer
anytime that the stock market is open.

Well now that you know that you can do online stock trading with a minimal investment you should get
started today and then start learning about the stock market and choose the stocks you want to invest
in.

One say's "I bought "XYZ Company" at Rs.2200 and immediately after I bought the stock price dropped to
Rs.2000." I feel sad. Another comes with a different version "I sold "XYZ Company" at Rs.2000 and it
went up to Rs.2400 same evening" I made an imaginary loss of Rs.400 per share.

Solution:
 
You can buy more shares @ Rs.2000 and reduce your overall
buying cost. This has to be done only if believe in the
fundamentals,management and the future prospects of the
company.
To do this you need to keep money ready.whatever money you have and want to invest,split it into two
parts. Then keep 50% cash aside, only invest with other 50%.So if need to buy more of any stock when
the price falls you have ready cash.

Also now if you have 200 shares of XYZ Company 100 @ Rs.2200 and 100 @ Rs.2000.Then the price
goes up to Rs.2400. Sell only 100 of the shares.Then if the price further shot up, you have some shares
to sell And participate in the rally to make money.

Next, You sold the share and the price went up. The solution to this is never sell all the shares at one
time. Sell only 50% of your shares.So if he price goes up later you still have the other 50% to sell and
make profit.

The golden Rule is to first do your own analysis of the stock before investing and buy on tips.

Also invest only in companies which declare dividends every year. To be sure that you are not
investing in loss making companies.

Every Market expert advise to do your stock analysis before investing in the stock market. But nobody
tells you how.

Well in my next article I will write about how to do stock analysis using various tools such as financial
ratios and by checking the track records of the companies you plan to invest in.

P.S: If you are not Indian then replace the Rs. into your own local currency to understand the article

Technical Analysis is a method of evaluating future security prices and market directions based on
statistical analysis of variables such as trading volume, price changes, etc., to identify patterns.

A stock market term - The attempt to look for numerical trends in a random function. The stock market
used to be filled with technical analysts deciding what to buy and sell, until it was decided that their
success rate is no better than chance. Now technical stock analysis is virtually non-existent. The Readers
Submitted Examples page has more on this topic.

Research and examination of the market and securities as it relates to their supply and demand in the
marketplace. The technician uses charts and computer programs to identify and project price trends. The
analysis includes studying price movements and trading volumes to determine patterns such as Head
and Shoulder Formations and W Formations. Other indicators include support and resistance levels, and
moving averages. In contrast to fundamental analysis, technical analysis does not consider a
corporation's financial data.

Technical analysts study trading histories to identify price trends in particular stocks, mutual funds,
commodities, or options in specific market sectors or in the overall financial markets. They use their
findings to predict probable, often short-term, trading patterns in the investments that they study. The
speed (and advocates would say the accuracy) with which the analysts do their work depends on the
development of increasingly sophisticated computer programs.

Technical Analysis supposes markets have memory.If so, past prices, or the current price momentum,
can give an idea of the future price evolution. Technical Analysis is a tool to detect if a trend (and thus
the investor's behavior) will persist or break. It gives some results but can be deceptive as it relies mostly
on graphic signals that are often intertwined, unclear or belated. It might become a source of
representiveness heuristic (spotting patterns where there are none)
Technical analysis has become increasingly popular over the past several years, as more and more
people believe that the historical performance of a stock is a strong indication of future performance.
The use of past performance should come as no surprise. People using fundamental analysis have
always looked at the past performance of companies by comparing fiscal data from previous quarters and
years to determine future growth. The difference lies in the technical analyst's belief that securities move
according to very predictable trends and patterns. These trends continue until something happens to
change the trend, and until this change occurs, price levels are predictable.

There are many instances of investors successfully trading a security using only their knowledge of the
security's chart, without even understanding what the company does. However, although technical
analysis is a terrific tool, most agree it is much more effective when used in combination with
fundamental analysis.

Fundamental Analysis

Fundamental analysis looks at a share’s market price in light of the company’s underlying business
proposition and financial situation. It involves making both quantitative and qualitative judgements about a
company. Fundamental analysis can be contrasted with 'technical analysis’, which seeks to make
judgements about the performance of a share based solely on its historic price behavior and without
reference to the underlying business, the sector it's in, or the economy as a whole. This is done by
tracking and charting the companies stock price, volume of shares traded day to day, both on the
company itself and also on its competitors. In this way investors hope to build up a picture of future
price movements.

What is NET ASSET VALUE ?

The Term Net Asset Value (NAV) is used by investment companies to measure net assets. It is
calculated by subtracting liabilities from the value of a fund's securities and other items of value and
dividing this by the number of outstanding shares. Net asset value is popularly used in newspaper
mutual fund tables to designate the price per share for the fund.

The value of a collective investment fund based on the market price of securities held in its portfolio. Units
in open ended funds are valued using this measure. Closed ended investment trusts have a net asset
value but have a separate market value. NAV per share is calculated by dividing this figure by the number
of ordinary shares. Investments trusts can trade at net asset value or their price can be at a premium or
discount to NAV.

Value or purchase price of a share of stock in a mutual fund. NAV is calculated each day by taking the
closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities,
then dividing the result (total net assets) by the total number of shares outstanding.

Calculating NAVs - Calculating mutual fund net asset values is easy. Simply take the current market
value of the fund's net assets (securities held by the fund minus any liabilities) and divide by the number
of shares outstanding. So if a fund had net assets of Rs.50 lakh and there are one lakh shares of the
fund, then the price per share (or NAV) is Rs.50.00.

IPO – Initial Public Offering

Public issues can be classified into Initial Public offerings and further public offerings. In a public offering,
the issuer makes an offer for new investors to enter its shareholding family. The issuer company makes
detailed disclosures as per the DIP guidelines in its offer document and offers it for subscription. Initial
Public Offering (IPO ) is when an unlisted company makes either a fresh issue of securities or an offer
for sale of its existing securities or both for the first time to the public. This paves way for listing and
trading of the issuer’s securities.

IPO is New shares Offered to the public in the Primary Market .The first time the company is traded on
the stock exchange. A prospectus is issued to read about its risk before investing. IPO is A company's
first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young,
small companies seeking outside equity capital and a public market for their stock. Investors purchasing
stock in IPOs generally must be prepared to accept very large risks for the possibility of large gains.
Sometimes, Just before the IPO is launched, Existing share Holders get a very liberal bonus issues as a
reward for their faith in risking money when the project was new

How to apply to a public issue ?

When a company floats a public issue or IPO, it prints forms for application to be filled by the investors.
Public issues are open for a few days only. As per law, any public issue should be kept open for a
minimum of 3days and a maximum of 21 days. For issues, which are underwritten by financial institutions,
the offer should be kept open for a minimum of 3 days and a maximum of 21 days. For issues, which are
underwritten by all India financial institutions, the offer should be kept open for a maximum of 10 days.
Generally, issues are kept open for only 3 to 4 days. The duly complete application from, accompanied by
cash, cheque, DD or stock invest should be deposited before the closing date as per the instruction on
the from. IPO's by investment companies (closed end funds) usually contain underwriting fees which
represent a load to buyers.

Before applying for any IPO , analyse the following factors:

1. Who are the Promoters ? What is their credibility and track record ?

2. What is the company manufacturing or providing services - Product, its potential

3. Does the Company have any Technology tie-up ? if yes , What is the reputation of the collaborators

4. What has been the past performance of the Company offering the IPO ?

5. What is the Project cost, What are the means of financing and profitability projections ?

6. What are the Risk factors involved ?

7. Who has appraised the Project ? In India Projects apprised by IDBI and ICICI have more credibility
than small Merchant Bankers

How to make payments for IPOs:

The payment terms of any IPO or Public issue is fixed by the company keeping in view its fund
requirements and the statutory regulations. In general, companies stipulate that either the entire money
should be paid along with the application or 50 percent of the entire amount be paid along with the
application and rest on allotment. However, if the funds requirements is staggered, the company may ask
for the money in calls, that is, the company demands for the money after allotment as and when the cash
flow demands. As per the statutory requirements, for public issue large than Rs. 250 crore, the money is
to be collected as under:

25 per cent on application

25 per cent on allotment

50 per cent in two or more calls

Generally, most shares have a face value (i.e. the value as in a balance sheet) of Rs.10 though not
always offered to the public at this price. Companies can offer a share with a face value of Rs.10 to
the public at a higher price.

The difference between the offer price and the face value is called the premium. As per the SEBI
guidelines, new companies can offer shares to the public at a premium provided :

1.The promoter company has a 3 years consistent record of profitable working.

2.The promoter takes up at least 50 per cent of the shares in the issue.

3.All parties applying to the issue should be offered the same instrument at the same terms, especially
regarding the premium.

4.The propectus should provide justification for the propose premium. On the other hand, exisiting
companies can make a premium issue without the above restrictions.

A company’s aim is to raise money and simultaneously serve the equity capital. As far as accounting is
concerned, premium is credited to reserves and surplus and it does not increase the equity. Therefore,
a company which raises Rs.100 crores by way of shares at say Rs.90 premium per share increases its
equity by only Rs.10 crores, which is easier to service with an investment of Rs.100 crores.

Thus the companies seek to make premium issues. As well shall see later, a premium issue can
increase the book value without decreasing the EPS. In a buoyant stock market when good shares trade
at very high prices, companies realize that it’s easy to command a high premium.

There are two ways for investors to get shares from the primary and secondary markets. In primary
markets, securities are bought by way of public issue directly from the company. In Secondary market
share are traded between two investors.

PRIMARY MARKET
Market for new issues of securities, as distinguished from the Secondary Market, where previously
issued securities are bought and sold.

A market is primary if the proceeds of sales go to the issuer of the securities sold.

This is part of the financial market where enterprises issue their new shares and bonds. It is characterised
by being the only moment when the enterprise receives money in exchange for selling its financial assets.

SECONDARY MARKET
The market where securities are traded after they are initially offered in the primary market. Most trading
is done in the secondary market.
To explain further, it is Trading in previously issued financial instruments. An organized market for used
securities. Examples are the New York Stock Exchange (NYSE), Bombay Stock Exchange
(BSE),National Stock Exchange NSE, bond markets, over-the-counter markets, residential mortgage
loans, governmental guaranteed loans etc.

 A stock broker is a person or a firm that trades on its clients behalf, you tell them what you want to
invest in and they will issue the buy or sell order. Some stock brokers also give out financial advice that
you a charged for.

It wasn’t too long ago and investing was very expensive because you had to go through a full service
broker which would give you advice on what to do and would charge you a hefty fee for it. Now there are
a plethora of discount stock brokers such as Scottrade http://www.scottrade.com now you can trade
stocks for a low fee such as $7 total.

I can think of three different types of stock brokers.

1. Full Service Broker - A full-service broker can provide a bunch of services such as investment
research advice, tax planning and retirement planning.

2. Discount Broker – A discount broker let’s you buy and sell stocks at a low rate but doesn’t provide any
investment advice.

3. Direct-Access Broker- A direct access broker lets you trade directly with the electronic communication
networks (ECN’s) so you can trade faster. Active traders such as day traders tend to use Direct Access
Brokers

So as you can tell there a few options for a stock broker and you really need to pick which one suits you
needs

In order to understand what stocks are and how stock markets work, we need to dive into history--
specifically, the history of what has come to be known as the corporation, or sometimes the limited liability
company (LLC). Corporations in one form or another have been around ever since one guy convinced a
few others to pool their resources for mutual benefit.

The first corporate charters were created in Britain as early as the sixteenth century, but these were
generally what we might think of today as a public corporation owned by the government, like the postal
service.

Privately owned corporations came into being gradually during the early 19th century in the United
States , United Kingdom and western Europe as the governments of those countries started allowing
anyone to create corporations.

In order for a corporation to do business, it needs to get money from somewhere. Typically, one or more
people contribute an initial investment to get the company off the ground. These entrepreneurs may
commit some of their own money, but if they don't have enough, they will need to persuade other people,
such as venture capital investors or banks, to invest in their business.

They can do this in two ways: by issuing bonds, which are basically a way of selling debt (or taking out a
loan, depending on your perspective), or by issuing stock, that is, shares in the ownership of the
company.
Long ago stock owners realized that it would be convenient if there were a central place they could go to
trade stock with one another, and the public stock exchange was born. Eventually, today's stock markets
grew out of these public places.

Stocks

A corporation is generally entitled to create as many shares as it pleases. Each share is a small piece
of ownership. The more shares you own, the more of the company you own, and the more control you
have over the company's operations. Companies sometimes issue different classes of shares, which
have different privileges associated with them.

So a corporation creates some shares, and sells them to an investor for an agreed upon price, the
corporation now has money. In return, the investor has a degree of ownership in the corporation, and can
exercise some control over it. The corporation can continue to issue new shares, as long as it can
persuade people to buy them. If the company makes a profit, it may decide to plow the money back into
the business or use some of it to pay dividends on the shares.

Public Markets

How each stock market works is dependent on its internal organization and government regulation. The
NYSE (New York Stock Exchange) is a non-profit corporation, while the NASDAQ (National
Association of Securities Dealers Automated Quotation) and the TSE (Toronto Stock Exchange)
are for-profit businesses, earning money by providing trading services.

Most companies that go public have been around for at least a little while. Going public gives the
company an opportunity for a potentially huge capital infusion, since millions of investors can now easily
purchase shares. It also exposes the corporation to stricter regulatory control by government regulators.

When a corporation decides to go public, after filing the necessary paperwork with the government and
with the exchange it has chosen, it makes an initial public offering (IPO). The company will decide how
many shares to issue on the public market and the price it wants to sell them for. When all the shares in
the IPO are sold, the company can use the proceeds to invest in the business.

Stocks Basics: Introduction

Wouldn't you love to be a business owner without ever having to show up at work? Imagine if you could sit back,
watch your company grow, and collect the dividend checks as the money rolls in! This situation might sound like a
pipe dream, but it's closer to reality than you might think.
As you've probably guessed, we're talking about owning stocks. This fabulous category of financial instruments is,
without a doubt, one of the greatest tools ever invented for building wealth. Stocks are a part, if not the cornerstone,
of nearly any investment portfolio. When you start on your road to financial freedom, you need to have a solid
understanding of stocks and how they trade on the stock market.

Over the last few decades, the average person's interest in the stock market has grown exponentially. What was
once a toy of the rich has now turned into the vehicle of choice for growing wealth. This demand coupled with
advances in trading technology has opened up the markets so that nowadays nearly anybody can own stocks.

Despite their popularity, however, most people don't fully understand stocks. Much is learned from conversations
around the water cooler with others who also don't know what they're talking about. Chances are you've already
heard people say things like, "Bob's cousin made a killing in XYZ company, and now he's got another hot tip..." or
"Watch out with stocks--you can lose your shirt in a matter of days!" So much of this misinformation is based on a
get-rich-quick mentality, which was especially prevalent during the amazing dotcom market in the late '90s. People
thought that stocks were the magic answer to instant wealth with no risk. The ensuing dotcom crash proved that this
is not the case. Stocks can (and do) create massive amounts of wealth, but they aren't without risks. The only
solution to this is education. The key to protecting yourself in the stock market is to understand where you are putting
your money.

It is for this reason that we've created this tutorial: to provide the foundation you need to make investment decisions
yourself. We'll start by explaining what a stock is and the different types of stock, and then we'll talk about how they
are traded, what causes prices to change, how you buy stocks and much more.
Stocks Basics: What Are Stocks?
The Definition of a Stock
Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company's assets
and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say
shares, equity, or stock, it all means the same thing.

Being an Owner
Holding a company's stock means that you are one of the many owners (shareholders) of a company and, as such,
you have a claim (albeit usually very small) to everything the company owns. Yes, this means that technically you
own a tiny sliver of every piece of furniture, every trademark, and every contract of the company. As an owner, you
are entitled to your share of the company's earnings as well as any voting rights attached to the stock.

Example stock certificate

(Click to enlarge)

A stock is represented by a stock certificate. This is a fancy piece of paper that is proof of your ownership. In today's
computer age, you won't actually get to see this document because your brokerage keeps these records
electronically, which is also known as holding shares "in street name". This is done to make the shares easier to
trade. In the past, when a person wanted to sell his or her shares, that person physically took the certificates down to
the brokerage. Now, trading with a click of the mouse or a phone call makes life easier for everybody.

Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business.
Instead, one vote per share to elect the board of directors at annual meetings is the extent to which you have a say in
the company. For instance, being a Microsoft shareholder doesn't mean you can call up Bill Gates and tell him how
you think the company should be run. In the same line of thinking, being a shareholder of Anheuser Busch doesn't
mean you can walk into the factory and grab a free case of Bud Light!

The management of the company is supposed to increase the value of the firm for shareholders. If this doesn't
happen, the shareholders can vote to have the management removed, at least in theory. In reality, individual
investors like you and I don't own enough shares to have a material influence on the company. It's really the big boys
like large institutional investors and billionaire entrepreneurs who make the decisions.
For ordinary shareholders, not being able to manage the company isn't such a big deal. After all, the idea is that you
don't want to have to work to make money, right? The importance of being a shareholder is that you are entitled to a
portion of the company’s profits and have a claim on assets. Profits are sometimes paid out in the form of dividends.
The more shares you own, the larger the portion of the profits you get. Your claim on assets is only relevant if a
company goes bankrupt. In case of liquidation, you'll receive what's left after all the creditors have been paid. This
last point is worth repeating: the importance of stock ownership is your claim on assets and earnings. Without
this, the stock wouldn't be worth the paper it's printed on.

Another extremely important feature of stock is its limited liability, which means that, as an owner of a stock, you are
not personally liable if the company is not able to pay its debts. Other companies such as partnerships are set up so
that if the partnership goes bankrupt the creditors can come after the partners (shareholders) personally and sell off
their house, car, furniture, etc. Owning stock means that, no matter what, the maximum value you can lose is the
value of your investment. Even if a company of which you are a shareholder goes bankrupt, you can never lose your
personal assets.

Debt vs. Equity

Why does a company issue stock? Why would the founders share the profits with thousands of people when they
could keep profits to themselves? The reason is that at some point every company needs to raise money. To do this,
companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing
stock. A company can borrow by taking a loan from a bank or by issuing bonds. Both methods fit under the umbrella
of debt financing. On the other hand, issuing stock is called equity financing. Issuing stock is advantageous for the
company because it does not require the company to pay back the money or make interest payments along the way.
All that the shareholders get in return for their money is the hope that the shares will someday be worth more than
what they paid for them. The first sale of a stock, which is issued by the private company itself, is called the initial
public offering (IPO).

It is important that you understand the distinction between a company financing through debt and financing through
equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal)
along with promised interest payments. This isn't the case with an equity investment. By becoming an owner, you
assume the risk of the company not being successful - just as a small business owner isn't guaranteed a return,
neither is a shareholder. As an owner, your claim on assets is less than that of creditors. This means that if a
company goes bankrupt and liquidates, you, as a shareholder, don't get any money until the banks and bondholders
have been paid out; we call this absolute priority. Shareholders earn a lot if a company is successful, but they also
stand to lose their entire investment if the company isn't successful.

Risk
It must be emphasized that there are no guarantees when it comes to individual stocks. Some companies pay out
dividends, but many others do not. And there is no obligation to pay out dividends even for those firms that have
traditionally given them. Without dividends, an investor can make money on a stock only through its appreciation in
the open market. On the downside, any stock may go bankrupt, in which case your investment is worth nothing.

Although risk might sound all negative, there is also a bright side. Taking on greater risk demands a greater return on
your investment. This is the reason why stocks have historically outperformed other investments such as bonds or
savings accounts. Over the long term, an investment in stocks has historically had an average return of around 10-
12%.

Stocks Basics: Different Types Of Stocks

Common Stock
Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact, the
majority of stock is issued is in this form. We basically went over features of common stock in the last section.
Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one
vote per share to elect the board members, who oversee the major decisions made by management.

Over the long term, common stock, by means of capital growth, yields higher returns than almost every other
investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt
and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred
shareholders are paid.

Preferred Stock
Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting
rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed
dividend forever. This is different than common stock, which has variable dividends that are never guaranteed.
Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common
shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the
option to purchase the shares from shareholders at anytime for any reason (usually for a premium).

Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares
is to see them as being in between bonds and common shares.

Different Classes of Stock

Common and preferred are the two main forms of stock; however, it's also possible for companies to customize
different classes of stock in any way they want. The most common reason for this is the company wanting the voting
power to remain with a certain group; therefore, different classes of shares are given different voting rights. For
example, one class of shares would be held by a select group who are given ten votes per share while a second
class would be issued to the majority of investors who are given one vote per share.

When there is more than one class of stock, the classes are traditionally designated as Class A and Class B.
Berkshire Hathaway (ticker: BRK), has two classes of stock. The different forms are represented by placing the letter
behind the ticker symbol in a form like this: "BRKa, BRKb" or "BRK.A, BRK.B".

Stocks Basics: How Stocks Trade

Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price. Some
exchanges are physical locations where transactions are carried out on a trading floor. You've probably seen pictures
of a trading floor, in which traders are wildly throwing their arms up, waving, yelling, and signaling to each other. The
other type of exchange is virtual, composed of a network of computers where trades are made electronically.
The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the
risks of investing. Just imagine how difficult it would be to sell shares if you had to call around the neighborhood trying
to find a buyer. Really, a stock market is nothing more than a super-sophisticated farmers' market linking buyers and
sellers.

Before we go on, we should distinguish between the primary market and the secondary market. The primary market
is where securities are created (by means of an IPO) while, in the secondary market, investors trade previously-
issued securities without the involvement of the issuing-companies. The secondary market is what people are
referring to when they talk about the stock market. It is important to understand that the trading of a company's stock
does not directly involve that company.

The New York Stock Exchange

The most prestigious exchange in the world is the New York Stock Exchange (NYSE). The "Big Board" was founded
over 200 years ago in 1792 with the signing of the Buttonwood Agreement by 24 New York City stockbrokers and
merchants. Currently the NYSE, with stocks like General Electric, McDonald's, Citigroup, Coca-Cola, Gillette and
Wal-mart, is the market of choice for the largest companies in America.

The NYSE is the first type of exchange (as we referred to above), where much of the
trading is done face-to-face on a trading floor. This is also referred to as a listed
exchange. Orders come in through brokerage firms that are members of the exchange
and flow down to floor brokers who go to a specific spot on the floor where the stock
trades. At this location, known as the trading post, there is a specific person known as
the specialist whose job is to match buyers and sellers. Prices are determined using an
auction method: the current price is the highest amount any buyer is willing to pay and
the lowest price at which someone is willing to sell. Once a trade has been made, the
details are sent back to the brokerage firm, who then notifies the investor who placed the
order. Although there is human contact in this process, don't think that the NYSE is still
in the stone age: computers play a huge role in the process.

The trading floor of the

NYSE
The Nasdaq
The second type of exchange is the virtual sort called an over-the-counter (OTC) market, of which the Nasdaq is the
most popular. These markets have no central location or floor brokers whatsoever. Trading is done through a
computer and telecommunications network of dealers. It used to be that the largest companies were listed only on the
NYSE while all other second tier stocks traded on the other exchanges. The tech boom of the late '90s changed all
this; now the Nasdaq is home to several big technology companies such as Microsoft, Cisco, Intel, Dell and Oracle.
This has resulted in the Nasdaq becoming a serious competitor to the NYSE.

On the Nasdaq brokerages act as market makers for various stocks. A market maker
provides continuous bid and ask prices within a prescribed percentage spread for shares
for which they are designated to make a market. They may match up buyers and sellers
directly but usually they will maintain an inventory of shares to meet demands of
investors.

Other Exchanges
The third largest exchange in the U.S. is the American Stock Exchange (AMEX). The
AMEX used to be an alternative to the NYSE, but that role has since been filled by the
Nasdaq. In fact, the National Association of Securities Dealers (NASD), which is the
parent of Nasdaq, bought the AMEX in 1998. Almost all trading now on the AMEX is in
small-cap stocks and derivatives.

There are many stock exchanges located in just about every country around the world. The Nasdaq market
American markets are undoubtedly the largest, but they still represent only a fraction of site in Times Square
total investment around the globe. The two other main financial hubs are London, home of
the London Stock Exchange, and Hong Kong, home of the Hong Kong Stock Exchange.
The last place worth mentioning is the over-the-counter bulletin board (OTCBB). The
Nasdaq is an over-the-counter market, but the term commonly refers to small public companies that don’t meet the
listing requirements of any of the regulated markets, including the Nasdaq. The OTCBB is home to penny stocks
because there is little to no regulation. This makes investing in an OTCBB stock very risky.

Stocks Basics: What Causes Stock Prices To Change? Stock

prices change every day as a result of market forces. By this we mean that share prices change because of supply
and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely,
if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.

Understanding supply and demand is easy. What is difficult to comprehend is what makes people like a particular
stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news
is negative. There are many answers to this problem and just about any investor you ask has their own ideas and
strategies.

That being said, the principal theory is that the price movement of a stock indicates what investors feel a company is
worth. Don't equate a company's value with the stock price. The value of a company is its market capitalization, which
is the stock price multiplied by the number of shares outstanding. For example, a company that trades at $100 per
share and has 1 million shares outstanding has a lesser value than a company that trades at $50 that has 5 million
shares outstanding ($100 x 1 million = $100 million while $50 x 5 million = $250 million). To further complicate things,
the price of a stock doesn't only reflect a company's current value, it also reflects the growth that investors expect in
the future.

The most important factor that affects the value of a company is its earnings. Earnings are the profit a company
makes, and in the long run no company can survive without them. It makes sense when you think about it. If a
company never makes money, it isn't going to stay in business. Public companies are required to report their
earnings four times a year (once each quarter). Wall Street watches with rabid attention at these times, which are
referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their
earnings projection. If a company's results surprise (are better than expected), the price jumps up. If a company's
results disappoint (are worse than expected), then the price will fall.

Of course, it's not just earnings that can change the sentiment towards a stock (which, in turn, changes its price). It
would be a rather simple world if this were the case! During the dotcom bubble, for example, dozens of internet
companies rose to have market capitalizations in the billions of dollars without ever making even the smallest profit.
As we all know, these valuations did not hold, and most internet companies saw their values shrink to a fraction of
their highs. Still, the fact that prices did move that much demonstrates that there are factors other than current
earnings that influence stocks. Investors have developed literally hundreds of these variables, ratios and indicators.
Some you may have already heard of, such as the price/earnings ratio, while others are extremely complicated and
obscure with names like Chaikin oscillator or moving average convergence divergence.

So, why do stock prices change? The best answer is that nobody really knows for sure. Some believe that it isn't
possible to predict how stock prices will change, while others think that by drawing charts and looking at past price
movements, you can determine when to buy and sell. The only thing we do know is that stocks are volatile and can
change in price extremely rapidly.

The important things to grasp about this subject are the following:

1. At the most fundamental level, supply and demand in the market determines stock price.
2. Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the
share price of two companies is meaningless.
3. Theoretically, earnings are what affect investors' valuation of a company, but there are other indicators that
investors use to predict stock price. Remember, it is investors' sentiments, attitudes and expectations that ultimately
affect stock prices.
4. There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no
one theory that can explain everything.

Stocks Basics: Buying Stocks

You've now learned what a stock is and a little bit about the principles behind the stock market, but how do you
actually go about buying stocks? Thankfully, you don't have to go down into the trading pit yelling and screaming your
order. There are two main ways to purchase stock:
1. Using a Brokerage
The most common method to buy stocks is to use a brokerage. Brokerages come in two different flavors. Full-service
brokerages offer you (supposedly) expert advice and can manage your account; they also charge a lot. Discount
brokerages offer little in the way of personal attention but are much cheaper.

At one time, only the wealthy could afford a broker since only the expensive, full-service brokers were available. With
the internet came the explosion of online discount brokers. Thanks to them nearly anybody can now afford to invest in
the market. 

2. DRIPs & DIPs

Dividend reinvestment plans (DRIPs) and direct investment plans (DIPs) are plans by which individual companies, for
a minimal cost, allow shareholders to purchase stock directly from the company. Drips are a great way to invest small
amounts of money at regular intervals

Stocks Basics: How to Read A Stock Table/Quote

Any financial paper has stock quotes that will look something like the image below:
Columns 1 & 2: 52-Week High and Low - These are the highest and lowest prices at which a stock has traded over
the previous 52 weeks (one year). This typically does not include the previous day's trading.

Column 3: Company Name & Type of Stock - This column lists the name of the company. If there are no special
symbols or letters following the name, it is common stock. Different symbols imply different classes of shares. For
example, "pf" means the shares are preferred stock.

Column 4: Ticker Symbol - This is the unique alphabetic name which identifies the stock. If you watch financial TV,
you have seen the ticker tape move across the screen, quoting the latest prices alongside this symbol. If you are
looking for stock quotes online, you always search for a company by the ticker symbol. If you don't know what a
particular company's ticker is you can search for it at: http://finance.yahoo.com/l.

Column 5: Dividend Per Share - This indicates the annual dividend payment per share. If this space is blank, the
company does not currently pay out dividends.

Column 6: Dividend Yield - The percentage return on the dividend. Calculated as annual dividends per share
divided by price per share.

Column 7: Price/Earnings Ratio - This is calculated by dividing the current stock price by earnings per share from
the last four quarters. For more detail on how to interpret this, see our P/E Ratio tutorial.

Column 8: Trading Volume - This figure shows the total number of shares traded for the day, listed in hundreds. To
get the actual number traded, add "00" to the end of the number listed.

Column 9 & 10: Day High and Low - This indicates the price range at which the stock has traded at throughout the
day. In other words, these are the maximum and the minimum prices that people have paid for the stock.

Column 11: Close - The close is the last trading price recorded when the market closed on the day. If the closing
price is up or down more than 5% than the previous day's close, the entire listing for that stock is bold-faced. Keep in
mind, you are not guaranteed to get this price if you buy the stock the next day because the price is constantly
changing (even after the exchange is closed for the day). The close is merely an indicator of past performance and
except in extreme circumstances serves as a ballpark of what you should expect to pay.

Column 12: Net Change - This is the dollar value change in the stock price from the previous day's closing price.
When you hear about a stock being "up for the day," it means the net change was positive.

Quotes on the Internet

Nowadays, it's far more convenient for most to get stock quotes off the Internet. This method is superior because
most sites update throughout the day and give you more information, news, charting, research, etc.
To get quotes, simply enter the ticker symbol into the quote box of any major financial site like Yahoo! Finance, CBS
Marketwatch, or MSN Moneycentral. The example below shows a quote for Microsoft (MSFT) from Yahoo Finance.
Interpreting the data is exactly the same as with the newspaper.

Stocks Basics: The Bulls, The Bears And The Farm

On Wall Street, the bulls and bears are in a constant struggle. If you haven't heard of these terms already, you
undoubtedly will as you begin to invest.
The Bulls
A bull market is when everything in the economy is great, people are finding jobs, gross domestic product (GDP) is
growing, and stocks are rising. Things are just plain rosy! Picking stocks during a bull market is easier because
everything is going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations
if stocks become overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a "bull"
and is said to have a "bullish outlook".

The Bears
A bear market is when the economy is bad, recession is looming and stock prices are falling. Bear markets make it
tough for investors to pick profitable stocks. One solution to this is to make money when stocks are falling using a
technique called short selling. Another strategy is to wait on the sidelines until you feel that the bear market is nearing
its end, only starting to buy in anticipation of a bull market. If a person is pessimistic, believing that stocks are going to
drop, he or she is called a "bear" and said to have a "bearish outlook".

The Other Animals on the Farm - Chickens and Pigs

Chickens are afraid to lose anything. Their fear overrides their need to make profits and so they turn only to money-
market securities or get out of the markets entirely. While it's true that you should never invest in something over
which you lose sleep, you are also guaranteed never to see any return if you avoid the market completely and never
take any risk, 

Pigs are high-risk investors looking for the one big score in a short period of time. Pigs buy on hot tips and invest in
companies without doing their due diligence. They get impatient, greedy, and emotional about their investments, and
they are drawn to high-risk securities without putting in the proper time or money to learn about these investment
vehicles. Professional traders love the pigs, as it's often from their losses that the bulls and bears reap their profits.

What Type of Investor Will You Be?

There are plenty of different investment styles and strategies out there. Even though the bulls and bears are
constantly at odds, they can both make money with the changing cycles in the market. Even the chickens see some
returns, though not a lot. The one loser in this picture is the pig.

Make sure you don't get into the market before you are ready. Be conservative and never invest in anything you do
not understand. Before you jump in without the right knowledge, think about this old stock market saying:

"Bulls make money, bears make money, but pigs just get slaughtered!"
Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price. Some
exchanges are physical locations where transactions are carried out on a trading floor. You've probably seen pictures
of a trading floor, in which traders are wildly throwing their arms up, waving, yelling, and signaling to each other. The
other type of exchange is virtual, composed of a network of computers where trades are made electronically.