Basics of Stock Market
Financial markets provide their participants with the most favorable conditions for purchase/sale of financial instruments they have inside. Their major functions are: guaranteeing liquidity, forming assets prices within establishing proposition and demand and decreasing of operational expenses, incurred by the participants of the market.
Financial market comprises variety of instruments, hence its functioning totally depends on instruments held. Usually it can be classified according to the type of financial instruments and according to the terms of instruments' paying-off.
From the point of different types of instruments held the market can be divided into the one of promissory notes and the one of securities (stock market). The first one contains promissory instruments with the right for its owners to get some fixed amount of money in future and is called the market of promissory notes, while the latter binds the issuer to pay a certain amount of money according to the return received after paying-off all the promissory notes and is called stock market. There are also types of securities referring to both categories as, e.g., preference shares and converted bonds. They are also called the instruments with fixed return.
Another classification is due to paying-off terms of instruments. These are: market of assets with high liquidity (money market) and market of capital. The first one refers to the market of short-term promissory notes with assets age up to 12 months. The second one refers to the market of long-term promissory notes with instruments age surpasses 12 months. This classification can be referred to the bond market only as its instruments have fixed expiry date, while the stock market's not.
Now we are turning to the stock market.
As it was mentioned before, ordinary shares' purchasers typically invest their funds into the company-issuer and become its owners. Their weight in the process of making decisions in the company depends on the number of shares he/she possesses. Due to the financial experience of the company, its part in the market and future potential shares can be divided into several groups.
1. Blue Chips
Shares of large companies with a long record of profit growth, annual return over $4 billion, large capitalization and constancy in paying-off dividends are referred to as blue chips.
2. Growth Stocks
Shares of such company grow faster; its managers typically pursue the policy of reinvestment of revenue into further development and modernization of the company. These companies rarely pay dividends and in case they do the dividends are minimal as compared with other companies.
3. Income Stocks
Income stocks are the stocks of companies with high and stable earnings that pay high dividends to the shareholders. The shares of such companies usually use mutual funds in the plans for middle-aged and elderly people.
4. Defensive Stocks
These are the stocks whose prices stay stable when the market declines, do well during recessions and are able to minimize risks. They perform perfect when the market turns sour and are in requisition during economic boom.
These categories are widely spread in mutual funds, thus for better understanding investment process it is useful to keep in mind this division.
Shares can be issued both within the country and abroad. In case a company wants to issue its shares abroad it can use American Depositary Receipts (ADRs). ADRs are usually issued by the American banks and point at shareholders' right to possess the shares of a foreign company under the asset management of a bank. Each ADR signals of one or more shares possession.
When operating with shares, aside of purchase/sale ratio profits, you can also quarterly receive dividends. They depend on: type of share, financial state of the company, shares category etc.
Ordinary shares do not guarantee paying-off dividends. Dividends of a company depend on its profitability and spare cash. Dividends differ from each other as they are to be paid in a different period of time, with the possibility of being higher as well as lower. There are periods when companies do not pay dividends at all, mostly when a company is in a financial distress or in case executives decide to reinvest income into the development of the business. While calculating acceptable share price, dividends are the key factor.
Price of ordinary share is determined by three main factors: annual dividends rate, dividends growth rate and discount rate. The latter is also called a required income rate. The company with the high risks level is expected to have high required income rate. The higher cash flow the higher share prices and versus. This interdependence determines assets value. Below we will touch upon the division of share prices estimating in three possible cases with regard to dividends.
While purchasing shares, aside of risks and dividends analysis, it is absolutely important to examine company carefully as for its profit/loss accounting, balance, cash flows, distribution of profits between its shareholders, managers' and executives' wages etc. Only when you are sure of all the ins and outs of a company, you can easily buy or sell shares. If you are not confident of the information, it is more advisable not to hold shares for a long time (especially before financial accounting published).
Dr. Goldfinger
http://www.financegaes.com
More Resources
Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exitingMore Stocks & Mutual Funds Information:
Related Articles
The I Word is Coming to a Town Near You
Hello Inflation, it has been awhile, I see you on your way back again. Inflation? What inflation? Oh things like; Energy, diesel fuel, Aviation Fuel, Gasoline, Natural Gas, Milk, Wheat, Corn, Beef, Poultry, Hogs, Soy Beans, Building materials, paper, housing, Auto Prices, Health Care, Insurance, etc.
Stock Analysis
I receive emails from Morningstar. This company provides statistics and analysis of just about every publicly traded stock company you can think of as well as voluminous information on mutual funds around the world.
Being Wrong Buying Stock is Okay
Being wrong is OK, but let's not carry it to extremes. That applies to everything, but let's limit our discussion here to the stock market.
Discover the Retirement Breakthrough the Federal Government Created for You - The Roth IRA!
If you don't know what a Roth IRA is then stop everything, print this article and read it carefully as this will certainly be the most valuable information you read this year. This next retirement account is to your net worth what light bulb was to electricity.
The Value of Stocks of a Company
The debate rages all over Eastern and Central Europe, in countries in transition as well as in Western Europe. It raged in Britain during the 80s: Is privatization really the robbery in disguise of state assets by a select few, cronies of the political regime? Margaret Thatcher was accuse of it - and so was the Agency of Transformation in the Republic of Macedonia.
Defining a Long-Term Investment in the Stock Market
For some "long term" would mean holding a stock position over the weekend. For others, it may mean holding a security for at least 1 year for the purpose of declaring a long-term capital gain, thus saving on taxes.
Trading Tips No 6: The High Cost of Low Cost Stock Market Information
It has been said that low cost or even free stock market information or trading advice can be the most expensive advice you can get. The meaning is clear.
Exchange Traded Funds Primer
Exchange Traded Funds (ETFs) are a group of passive index funds that trade on an exchange like an individual stock. At the time of writing there are 162 ETFs with $220 billion in assets under management trading on U.
Stock Market Investing Odds
The greatest stock market myth is the idea that investing in stocks is a form of gambling!The financial markets are often compared to a casino. Put some money on X stock and you might as well be playing craps!If that's your impression, and it's keeping you out of the markets, consider this: If investing is organized gambling, it's one of the rare kinds where the odds are stacked in your favor!Why is that?Corporate profits are the key to understanding the investor's edge.
Low Expense Ratio
One of the big advertising kicks today from mutual funds is to tell how low their expense ratio is and that you will make a great deal more money if you buy and hold with them. Partly true, but that is not the whole story.
Moving Averages
Every day on CNBC-TV they show a 200-day moving average line superimposed on the stock price history. It seems they give great credence to this manufactured line as it represents 10 months of price action.
Swing Trading Strategies
Using Swing Trading Strategies and Technical Analysis when Trading Stocks to Make Consistent Trading Profits.This article is one small part of a series of lessons using Swing Trading Strategies and Technical Analysis developed by WD Gann which are designed to show how anyone can build a profitable Stock or Commodity trading business from scratch.
How Much Money Can I Make With Trading? What Account Size Do I Need To Start?
What account size do I need?How much money can I make with trading?First of all, let's clarify a common misunderstanding: You never risk your full account size. You always have a "catastrophic stop", and it is important to define the "ruin" before you start trading.
It Cant Be Done
Wouldn't it be nice if you were only in the stock market when it was going up and have everything transferred to cash while it is going down? It is called 'market timing' and your broker or financial planner will tell you "it can't be done". What that person just told you is he doesn't know how to do it.
Dont Lose All Your Money
That sounds like good advice doesn't it? Don't lose all your money.After all what is an investor without funds in the brokerage account? Hint: BROKE!On the subject of investing, this means getting out of a trade when it goes against you.
The Stock Market Investor's Worst Enemy
Every stock market investor faces one primal enemy. An enemy so perverse, it will drive thousands of investors from the stock market through its ability to defeat even the most practiced investment strategy.
Selection Vs Direction
As I have said many times before in this column it really doesn't make any difference what you buy - stocks, funds or indexes - it takes smarts to know when to sell. Direction of the general market is more important than selection of any equity.
Pension Plans
If you have a pension plan at work you will want to read this and if you don't you will still want to because it affects your retirement account.There are two kinds of formal retirement plans that are set in place by employers.
Trading Systems
To become a successful trader you must have some kind of method or system to follow that will keep you on track. You may be buying and selling on tips, the weather or phases of the moon (there is a system like that).
Trade Stocks for Real
I read a comment by a forum member on another site earlier today that suggested that every investor should back test their system for at least twenty years. I disagree and will now tell you why.