Stocks

Stocks’ learning in 10 bullets

1. What is the meaning of a stock?
A stock is the minimal portion in the ownership of a company. The amount of stocks controlled by an investor represents a claim on the company’s assets and earnings.

2. Different forms of stocks
Common stocks are the majority or the only kind of stocks issued by a company. It gives voting rights (proportional, regarding the total amount of stocks issued) at the general meeting of shareholders, which is the supreme governing body. On the contrary, a preferred stock represents a degree of ownership and less or no voting rights, but incorporates priority in dividends’ claims.

3. Stock vs. Bond
Stock is equity, bond is debt.

4. What is the meaning and the scope of a stock market?
Stock market or stock exchange is a regulated capital and financial market in which buyers and sellers of securities, like stocks, transact purchases and sales respectively. A company can sell a stock stake via an initial public offering (IPO). After the successful completion of the IPO, the company could raise capital through the investors’ funds for development purposes. 

5. Top 5 stock markets by market capitalization
Firstly, let us explain the market capitalization term (abbrev. market cap). It is the market value that comes from the calculation of the number of all companies’ shares issued, multiplied by those current prices. The most valued stock exchanges globally are the following by far (as of 31 January 2015):
 - NYSE (New York Stock Exchange) – USA – Index: Dow Jones Industrial 30
 - Nasdaq – USA – Index: Nasdaq 100
 - LSE (London Stock Exchange) – UK – Index: FT 100
 - Japan Exchange Group – Japan – Index: Nikkei 225
 - Shanghai Stock Exchange – China – Index: SSE Composite

6. How stock market prices move?
Stock market prices are moving by the supply/demand economic rule. When more investors want to buy a stock (demand) than sell it (supply), then the price moves up and vice versa. 

7. Trading styles
 - Buy and hold (long-term placement)
 - Medium-term trading strategy
 - Short-term trading
 - Day trading
 - Use of stock derivative instruments (like futures, options etc)
 - Leveraged strategies, such as margin buying (leverage) and short selling (willingness for security’s price decline via borrowing, not owning of stocks)

8. Risk/Reward ratio
There are 3 objectives when an investor buys stocks:
 - Capital gains by uptrend movements at the stock prices
 - Dividends from company’s periodic earnings
 - Risk aversion (minimizing the risk of the invested capital). Actually, there is no guarantee regarding stock prices
Moreover, facts that affect stock prices are:
 - Macroeconomics data and financial news/announcements
 - Business sector fundamentals
 - Company’s economic statements and prospects
 - Technical analysis 

9. Kinds of stock placements
In this field we can summarize investors’ strategies by the type of shares owned by them. Moreover, a small tip: always consider diversifying your stocks portfolio
 - Growth stocks – refer to stocks of companies with a good prospect for a faster pace of growth than the rest of the economy
 - Blue-chips stocks – stocks issued by industry-leading companies
 - Dividend stocks – stocks with a high probability for dividend yields
 - Cyclical stocks – stocks that follow the economic/business cycles 
 - Defensive stocks – stocks of companies that don’t over-react at bad times, like food, beverages and drugs
 - Value stocks – stocks of companies with underpriced values
 - Speculative stocks – like stocks issued by dot-com companies or innovative companies with an excellent prospect etc
 - Penny stocks – shares of companies that trade at low prices (for high speculative traders)

10. Basic tools in stocks’ reading
The next bullets are the major elements that determine stock investment decisions, no matter if you are a top Wall St. fund manager or a small retail trader:
 - Earnings per Share (EPS) – compared to current stock price. Historical EPS data are also making a good investing sense
 - Price/Earnings (P/E) – it is the ratio that comes from the price of a share divided by the company’s earnings per share. Look for companies with P/E ratios lower than other companies in the same business sector
 - Debt/Equity ratio – look for fewer debts to equity. Always compare to other companies of the same industry
 - Book Value – the value of total assets minus the intangible assets and liabilities as it is written in the company’s financial statements
 - Price/Book Value (P/BV) – the ratio of the two factors mentioned above
 - ROE – Return on Equity. The amount of net income returned as a percentage of shareholders equity. The more, the better
 - Dividend Yield – yield coming from dividends that works as an annual income generator 

                                                               Photo: Trading floor on NYSE

 

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