February 2, 2016

Investing 101 – Stock Basics

162918678-man-writing-on-his-newspaper-gettyimagesStocks, bonds, mutual funds, annuities, chances are you own a couple of these financial instruments and possibly all of them in your portfolio. Wouldn’t it be nice if someone clearly explained what they are and why you should invest in them? Let’s see if we can get the basics of stocks straight in less than 5 minutes.

Stocks

When you own stock in a company you are a part owner of that company. Stock (also called equities) are sold in units called shares. Each share of stock in a company represents a fractional ownership in that company. Since most well-known companies have issued millions of shares their stock, each share represents a very small fraction of the overall ownership in that company.

An owner of stock (called a stockholder or shareholder) is entitled to a portion of the company’s profits if the company’s board of directors decides to distribute them. Profits that are distributed are called dividends. Dividends tend to be distributed on a quarterly basis. Not all companies distribute their profits to the stockholders. Young fast growing companies, in particular, usually choose to reinvest their profits in expanding business operations. Older established companies with few opportunities to grow their business, utility companies for example, tend to distribute a large portion of their profits in the form of dividends.

In situations where the company is sold or liquidated, shareholders will receive a cut of the net sale proceeds. All the company’s creditors get paid before this happens including employees, suppliers, creditors and even Uncle Sam when taxes are owed. The chance that there will be nothing left after everyone else gets paid is one of the intrinsic risks to stock ownership.

There are two ways to make money from owning stock – the cash flow from dividends and capital gains. If a stockholder sells their shares for more than the purchase price they make a profit called a capital gain.   The value of a company’s stock rises and falls based on the performance of the company and the outlook for the economy as a whole. If a company is successful, such that its business is expanding then people will want to buy its stock to get in on the growth potential. If the overall economy is expected to grow, this is expected to benefit many companies as well.   Companies tend to report on the performance of their business on a quarterly basis which can greatly impact the stock value. In between those quarterly reports the stock value is more influenced by the constant stream of reports about the state of the economy.

Companies are limited by the government as to how much and how often they can issue stock. Once they issue a share of stock, that stock is bought and sold on a stock exchanges such as the New York Stock Exchange or the NASDAQ Stock Exchange. Actual physical stock is rarely exchanged anymore; brokerage accounts are electronically credited or debited for the purchase or sale of stock. Companies contract with a transfer agent to keep track of the constant changes in the ownership of their stock.

Five minutes are almost up so let me just say that stock ownership is a good way to grow wealth but it must be done with a view to the long term. Stocks prices can fluctuate greatly in times of economic upheaval so it is not a place for putting saving for a near-term purchase. Over the long term though, stocks have always rebounded and rewarded the patient investor.

Amy WolffABOUT THE AUTHOR
Amy Wolff
AJW Financial, Inc.

Amy Wolff’s clients describe her as a financial educator and coach. She listens to their diverse concerns and guides them through life’s most stressful transitions toward confident financial literacy and independence. By remaining accessible and open to any question, Amy helps clients avoid pitfalls and make decisions today that align well with their plans long-term. Her approach to personalized financial guidance has given countless clients a non-judgmental place to make well-reasoned financial decisions for their futures and their loved ones.

Amy is a CERTIFIED FINANCIAL PLANNER™ professional (CFP®) and a Certified Divorce Financial Analyst™ (CDFA®). Feel free to learn more at www.ajwfinancial.com

Amy Jensen Wolff, CFP®, CDFA®
3300 Edinborough Way, Suite 550
Edina, MN 55435
Phone: 952-405-2000
www.ajwfinancial.com

Registered Representative offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC. Investment Advisory Services also offered through AdvisorNet Wealth Management. Cetera is under separate ownership from any other named entity.

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