We will look at several different aspects of basic investing. This includes; Stocks Mutual Funds DRIPS (Dividend Reinvesting Programs for Stocks) Glossary of Investing Terms
What are stocks? When a company issues shares of stock, they are using the cost of the stock as a type of “loan” from those who purchase the shares. When you own a share of stock, you are a part owner in the company with a claim (however small it may be) on every asset and every penny in earnings.
What does that entitle me to? Depending on the company, it means (hopefully) that the company will do well, and the price of the stock will go up. It also means that if the company pays a dividend, that it will pay you back a percentage of the profits it makes times each share of stock you own.
For example, if you own 100 shares of stock and the dividend is $.60 a share, then you would be paid $60.00 for owning the stock at the time the dividend was declared. Stocks also come in many sizes. The size of the stock is determined by the operating capital of the company. For example..
A stock is considered to be a nano cap is its initial capitalization is below 50 million. A micro cap if it is above 50 million to 300 million. Mid cap if between 2 billion to 10 billion Large Cap if above 10 billion to 200 billion and a Mega cap if it is 200 billion plus.
How do I buy shares of stock? There are several different markets that different companies are listed upon. The largest in the US is the NYSC which is located on Wall Street in New York City. It has a capitalization of 13.39 trillion. Other large stock exchanges include the Nasdaq and for commodities,(i.e. live stock, copper, etc.) the Chicago Board of Trade.
For most people, buying a share of stock will require the help of a stock broker. How can we find a good stock broker? There are several places to look, one is the Motley Fool. (Motleyfool.com) On this web site is a comparison of the larger discount brokers. Other places to look to help in making a choice would be Consumer Reports, which ranked online brokers in its May 2009 issue.
Mutual Funds are for those who would like to invest but are not sure what to invest in. The idea behind mutual funds, is the investor buys shares in a company that invests most of the money into shares of stocks that the mutual fund company believes will appreciate in value.
Due to the nature of the investment, the NAV or Net Asset Value of the mutual fund is set at the end of each trading day. It will go up and down just like a stock. Another feature that the mutual fund owner should know about is the concept of a “load” or “no load” fund.
A “no load” fund does not have a transaction cost to purchase shares, all of the money invested is working for the investor. For example, if you purchase $10,000 worth of a no-load mutual fund, all $10,000 will be invested into the fund. Read more: http://www.investopedia.com/terms/n/no- loadfund.asp#ixzz1rCV3l6TA
On the other hand, if you buy a load fund that charges a front-end load (sales commission) of 5%, the amount actually invested in the fund is only $9,500. If the load is back-ended, it means, when shares of the fund are sold, the $500 sales commission comes out of the proceeds. If the mutual fund is a level-load (12b-1 fee) is 1%, your fund balance will be charged $100 annually for as long as you own the fund. Read more: http://www.investopedia.com/terms/n/no- loadfund.asp#ixzz1rCVedksc
There are many good places to learn more about mutual funds. Two data bases that the MPL has that can help you are Value Line and Morningstar. You can find both of them when you look on the MPL front page and click on the “Research” link.
These two data bases are listed alphabetically. If you are at home, you will need your library card number and your PIN (personal Identification number, the last four digits of your phone number) to log in.
What are DRIPS? DRIPS are a type of dividend reinvesting program that allows the investor to own the stock directly, and invest as much or as little as they want at a time. This is a type of play that looks at the long term investment horizon 20+ years rather than focus on yearly gains.
Among the sites that you can learn about DRIPS, is one called, http://www.directinvesting.com/ On the Money Papers web site. It can be found by typing in the URL listed above or by Googling The Money Papers
Most DRIPs allow you to open an account with as little as a single share of the companys stock. That means that you can afford to open accounts in a number of companies, thus establishing a diversified portfolio! Once your account is open, you can build up your holdings by making specific dollar amount investments. Say you decide to fund your account with $50 on a regular basis. When the price of the share is low, say $25, your $50 investment will buy two shares, when it is high, say $100, your $50 buys only a half a share. You can contribute to fund your account in this manner for many years. For many companies, there is no commission or fee when you make such investments through the plan. You are in complete control of your investing. You invest what you want, when you want-some companies even allow you to automatically invest an amount every month! The shares that you buy are held in your name, not the brokers name ("street name").
You dont have to save up to invest. DRIPs allow you to invest as little as $25 or $50-some company programs even allow investments as small as $10! That cash investment buys as many shares (or fractions of shares) as the dollar amount buys based on the current market price of the shares at the time of the investment.
One of the better dictionaries of investment terms can be found at the Chicago Board of Trade site. http://www.cmegroup.com/education/glossa ry.html Here are some terms that you should know.
Assets Everything a company or person owns, including money, securities, equipment and real estate. Assets include everything that is owed to the company or person. Assets are listed on a companys balance sheet or an individuals net worth statement. Bear Market A market in which stock prices are falling. Bid The highest price a buyer is willing to pay for a stock. When combined with the ask price information, it forms the basis of a stock quote.
Blue Chip Stocks Stocks of leading and nationally known companies that offer a record of continuous dividend payments and other strong investment qualities. Bonds Promissory notes issued by a corporation or government to its lenders, usually with a specified amount of interest for a specified length of time. Bull Market: A market in which the stocks are rising or going up. Call Option An option which gives the holder the right, but not the obligation, to buy a fixed amount of a certain stock at a specified price within a specified time. Calls are purchased by investors who expect a price increase.
Cyclical Stock A stock of a company in an industry sector that is particularly sensitive to swings in economic conditions. Diversification Limiting investment risk by purchasing different types of securities from different companies representing different sectors of the economy. Dividend The portion of the issuers equity paid directly to shareholders. It is generally paid on common or preferred shares. The issuer or its representative provides the amount, frequency (monthly, quarterly, semi- annually, or annually), payable date, and record date. The exchange that the issue is listed on sets the ex-dividend/distribution (ex-d) date for entitlement. An issuer is under no legal obligation to pay either preferred or common dividends.
Growth Stock The shares of companies that have enjoyed better-than-average growth over recent years and are expected to continue their climb. Inflation An overall increase in prices for goods and services, usually measured by the percentage change in the Consumer Price Index. Mutual Fund A fund managed by an expert who invests in stocks, bonds, options, money market instruments or other securities. Mutual fund units can be purchased through brokers or, in some cases, directly from the mutual fund company. Yield This is the measure of the return on an investment and is shown as a percentage. A stock yield is calculated by dividing the annual dividend by the stocks current market price. For example, a stock selling at $50 and with an annual dividend of $5 per share yields 10%.