The stock market is a complex and dynamic arena where you can invest in stocks and other securities. Getting started in investing in stocks requires a fundamental knowledge of stocks, the different types of stock and the markets where stocks are traded.
It is tempting to jump into the action, but you are taking a big risk if you don't understand what stocks are and how the stock exchanges operate.
This series of articles will get you started in understanding some of the fundamentals. Your homework begins, but does not end here. There is much more to learn after this introduction.
Stocks are the basic units of ownership in publicly traded companies. There are two basic types of stocks. Your first step towards investing in stocks is to learn the difference between these two major types of stock.
Not all shares of stock are created equally. Authorized, restricted, float, outstanding and unissued shares all have different attributes. Investors need to know these terms to make informed decisions.
You will hear these terms and see some of them used in financial ratios, so it is important to understand how these types of shares differ.
We've all heard about the value of diversification in reducing risk in our portfolio, but be sure you understand that there are two types of diversification.
The purpose of diversification is to reduce volatility and improve overall performance. It works if you do diversification correctly.
Just like in war and football, investing is about offense and defense. It's hard to find success with just one tactic. Cyclical and non-cyclical stocks should be part of your arsenal.
One of the ways investors classify stocks is by type of business. The idea is to put companies in similar industries together for comparison purposes. Most analysts and financial media call these groupings "sectors" and you will often read or hear about how certain sector stocks are doing.
One of the ways you make money with stocks is by investing in companies that pay dividends.
Dividends are profits the company distributes to shareholders. The companies don't do this out of the kindness of their hearts - this is what a company is all about; making money for the owners.
Stock splits may seem like a gift to some investors, but there is little evidence that you benefit in any meaningful way when a company splits its stock.
Here's what happens. Amalgamated Kumquats, which is currently priced at $80 per share, announces a 2-for-1 stock split. If you own 100 shares before the split worth $8,000, you will own 200 shares worth $8,000 after the split.
The Dow is up (or down) so the market is great (or terrible).
If you read or listen to the popular media, you might get the impression that the Dow Jones Industrial Average, usually just the Dow, is the pulse of the market.
Other stock indexes like the S&P 500 or the Nasdaq Composite get play also, often in hushed or excited tones depending on numbers.
A listing and brief explanation of the major stock exchanges.
You can get a clue about where after-hours traders are thinking the market will open by looking at the indexes in relationship to "fair value."
Fair value is the relationship of a market index to its futures contract.