| What They Are |
A share of common stock gives an investor a portion of ownership in a company. The company initially sells shares of stock to the public, and investors can then trade shares in the secondary markets (on stock exchanges or on the over-the-counter market). Investors purchasing shares of stock either expect to receive a portion of the company's profits in dividends, expect the price of the stock to go up, or both.
In seeking dividends and price appreciation, investors are taking on inherent risks. If the company, the market, or both weakens, then the investor risks losing all or a portion of his investment. Stockholders are not responsible for a company's debt, and therefore cannot lose more than their initial investment.
In addition to giving an investor a portion of ownership in a company, a share of common stock also includes the right to vote for members of the board of directors as well as the right to vote on important management issues. In most situations, individual investors are not able to accumulate enough stock in a company to be able to influence voting decisions. This is usually done by large institutional shareholders and company insiders.
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| What They Can Do For Your Portfolio |
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Stocks offer no guarantees to investors, but over long periods of time they have performed better than any other type of investment. Stocks have historically returned an average of about 11% per year. Over the long-term, stocks are the best vehicle for overcoming inflation and building wealth.
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| Buying and Selling |
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In order to buy or sell stocks, you need to go through a brokerage house. A brokerage house is a company that is a member of one or more stock exchanges. The broker acts as an agent to execute the orders. A broker charges a commission for this service. The commission fee can vary from as low as $5 per trade up to hundreds and even thousands of dollars. The cost depends on the type of broker, the number of shares, the price of the stock, and the type of order.
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| Valuing Stocks |
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The price of a stock in the market changes constantly. Changes can be due to
market conditions, company and industry announcements, investor perceptions, and
many other factors.
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