Stocuri

A stock represents ownership in a company. Therefore, when you purchase stock, you be-come part owner of the company. The number of shares of a company's stock that you own generally indicates what portion of the company you own. For example, Walt Disney has sold 2,042,000,000 shares to the public. So if you owned 10 shares of the company's stock, the percentage of the company you would own is 0000005% (10/2,042,000,000 = 0000005%). The first time companies sell stock to the public in order to get enough money to build their businesses, they usually do it through a process called an Initial Public Offering or IPO.

What a Stock Is Not

Now, let's consider what a stock is not. Investing in a company (purchasing stock) is very different from lending money to a company (i.e. purchasing a corporate bond). When you buy the stock of a company, there is no guarantee that you will get your money back or that your stock will go up in value. By contrast, when you purchase a corporate bond (i.e. make a loan to a company), you will be repaid unless the company goes bankrupt. Even if the com-pany does go bankrupt, the company's lenders will get paid back first (with the proceeds of the sale of the company's assets) before the stockholders get a penny. Because those who own stock in a company take on more risk than those who lend money to the company, it's important that Teenvestors understand the basics of the stock market.

Two Types of Stock: Common and Preferred Stock

There are two basic types of stocks: common stock and preferred stock. Owning common stock entitles a Teenvestor to a share of a company's profit if the company decides to distribute those earnings by paying dividends. Common stock holders can also vote to determine a company's leadership and they can get a piece of the company's remaining value if it ever has to be sold due to bankruptcy. As a Teenvestor, you'll probably only purchase common stock.

Preferred stock generally pays a fixed rate of dividends. More importantly, the preferred stock dividends must be paid before common stockholders get their dividends. Because preferred stockholders get fixed dividends, they are not entitled to a larger share of the profits if the company does extremely well. On the other hand, they are taking on less risk because if the company does poorly, they still get paid dividends before the common stockholders.

STOCK CLASSIFICATION

Investors love to put stocks into various categories in order to make it easier to identify them. There are probably over one dozen stock classifications but we will describe only the following five here: blue-chip, growth, income, cyclical, and interest-rate-sensitive stocks.

Blue-Chip Stocks

Blue-chip stocks are stocks of the biggest companies in the country. They are usually the stocks of high quality companies with years of strong profit and steady dividend payments. They are also some of the safest stocks to invest in. You will probably not get rich overnight by investing in these stocks but you will sleep better knowing that you won't lose your hard-earned money either. The stocks that are part of The Dow, for example, are considered blue-chip stocks.

Growth Stocks

Growth stocks are stocks of companies with profits that are increasing quickly. This increase in profits is reflected in the rise in the company's stock price. The definition of the level of profit growth that determines whether a stock is a growth stock varies from time to time. At the present time, however, a net profit growth of 15% to 20% is the standard. Just as a tree can't grow to the heavens, a stock can't grow forever. At some point, the growth rate will slow down to modest growth of 10% or less.

A growth company usually spends a lot of money on research and puts all its profits back into the company instead of paying dividends. In addition, it usually sells unique products and, these days, it is likely to be a high technology company that depends on intellectual power (such as software companies). Some software, Internet, and other computer-related companies can be considered growth companies. While the stock prices of growth companies increase at a more rapid rate than the stocks of some blue-chip companies, they are also riskier because their prices can tumble just as quickly as they rise.