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Stocks 101 For Women...Mar 19 '01 Write an essay on this topic.
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The Bottom Line I am a firm believer that with knowledge comes power…and when we as women can acquire the knowledge, we are only empowering ourselves for the future.
In my previous essay, we examined various methods for women to get involved in their own financial future by becoming educated on the different types of ways to invest their money. By pursuing basic definitions of stocks, bonds, mutual funds, and real estate investments, I took the first step in looking into not only what was available for current or future investors, but also considering my own choice of action which I discovered was primarily dependent on my own personal taste as well as my financial goals. But the more I looked at the article I had written, I decided that simple definitions weren’t enough…what do I or anyone else that is interested in this topic need to know about getting started? Because of the popularity of the stock market in investment strategies, and its benefit of offering a greater control to the investor as well as an increased opportunity to reap larger benefits than some of the other investments out there…I decided to take the subject of stocks a bit further. Stocks: We now know that the term “stock” actually means a part ownership in a company. By purchasing a single stock, an individual is purchasing a piece of equity within the said company, as well as all of its future profits and/or losses down the road. One excellent example given on the Women’s Financial Network stated that “if XYZ company has 100 shares outstanding and you own five shares, you own five percent of the company.” Often times, stock ownership has other privileges attached to it, such as voting rights in company policies or a say in who makes up the companies board of directors…but this is not always the case. The price of a stock indicates to the market, the apparent worth of the company itself as well as a certain degree of hope that the company’s value will increase over time…and is set by the buyers as an indication of what they are or are not willing to pay for it. As the price of a stock fluctuates, it is a reflection of the amount of success and/or failure it is experiencing at that point in time and can also be a gauge for the economy as well. Overall, stocks are influenced by three mitigating factors: inflation, level of risk, and interest rates. Buying and Selling: Now in order to even begin the process of buying and selling stocks, an individual must open an account with a brokerage company. Companies like Ameritrade on the internet can serve as one such brokerage. Once that account has been opened, the individual must do their research. What companies have a history of increased stock values over the last few months or years? What social and economical factors have caused values to decline? Are there any patterns visible with a particular company’s stock…for example, does the stock in company ABC increase just before the Christmas holiday and then decline just after? By doing such research, you will be able to get an idea of which stocks might be better to invest in than others. It’s never a good idea to simply jump on a bandwagon because your gut tells you that a startup company has a revolutionary idea that can only increase in value and profits…sure, people have made money guessing that way, but the majority of investors don’t. The main idea in purchasing stock is the idea that they will increase in value over time, and by doing your homework, you will have an extra advantage and a complete history that will make your choice an educated and possibly less risky one. Selling stock is where profits are actually made and physically seen. The strategy behind selling stocks is to get rid of your equity in a particular company before the value decreases. For example, let’s say that you purchase ten stocks of a computer company right after the holiday season because the price has dipped drastically and its history has proven that it will regain its value when Christmas approaches once again. If each stock cost you $10, you would have paid out a total of $100 for ten shares of the company. The goal is to then sell those shares of stock during Christmas when the value increases to $25 per share…leaving the investor with a profit of $15 per share. This is how money is made. Now, in order to acquire the money you’ve invested plus your “capital gain” on the original investment, you must be able and willing to sell your shares to other would-be investors to that price of $25 per share. Ultimately, shares that aren’t sold are only worth paper value (also called “paper profit”), not monetary value…so it is important to be able to sell the shares to other buyers. Short Selling: This is a very common term which is a proactive approach to buying and selling stocks and involves several steps. Short selling occurs when an individual investor decides he would like to “borrow” a certain amount of shares from a particular brokerage or investment bank. Let’s say the person chooses to borrow twenty shares of stock of an internet company because they believe that the value of that internet company’s stock is going to decline within a short period of time. The investor takes his/her twenty shares of stock and is able to sell them on the market for $50 a share. He or she then must re-purchase the stocks on the market when the price drops because he is ultimately required to return those twenty shares of stock to the brokerage from which it was borrowed in the first place. However, the cleverness of this technique is that once the value of the shares have declined, the investor is able to re-acquire those same twenty shares of stock for $30 a share and return those shares to the brokerage…but netting a $20 profit per share in the process. P/E Ratio: A company’s PE Ratio is actually a formula where the stock price, or value of the company, is going to be compared to the company’s overall earnings. Many investors look to this strategy when choosing their stocks because it is a good indicator of how the company is growing and profiting. Earnings are at the very epicenter of computing a company’s value, and will ultimately indicate how much the investor will earn on their shares. Remember, when a company shows increases in its profits and value, the shares then mirror that success by increasing their value as well. Types of Stocks: -Large company- these are also known as “large cap” stocks and refer to those companies within the stock market that have the greatest overall value…which is usually somewhere around the $1 billion mark or higher. These stocks are some of the more popular ones and seem to be widely held by investors around the country and around the globe. Large company stocks offer greater stability to the investor than some of the other types which may be more prone to drastic changes in value. -Small company- these are also known as “small cap” stocks and refer to those companies that are in their startup stage or are very young companies looking to grow. Small company stocks have smaller values than large company stocks, and are subject to greater change over time and may prove to be more difficult to sell off when the investor decides to change their portfolio. -Value stocks- these are termed such because they provide investors with a greater amount of value for the initial cost of the shares. Individuals interested in value stocks believe that the lesser, bargain price that they pay for the shares in the beginning will grow into increased profits and value over the long run. These types of investors will actually favor the companies with the lower PE Ratios. -Growth stocks- this type of stock tends to show a company’s trend of increasing profitability and value very quickly in their earnings ratio. These companies will ultimately re-invest their overall profits and will pay little or no dividends to the investor. Because of their greater potential in growth and success, these types of stocks will be more expensive to purchase per share. -Income producing stocks- these stocks are a bit similar to the growth stocks, but involve more mature companies that have outgrown their original growth spurts, and don’t need the type of money reinvested into the company that the younger companies do. Thus, with shares of income producing stocks, investors will usually receive dividends on their shareholdings. Utilities are a great example of this type of stock. -American Depository Receipts- are also called “ADR’s” and refer to foreign or overseas companies that have chosen to become part of the American markets. Shares of these foreign companies are then traded just like shares of local companies and are valued according to the American dollar. Prices on these types of stocks are always adjusted according to the current rate of exchange. Types of Markets: -Organized Exchange- this is a type of market, such as the New York Stock Exchange (NYSE) which has been registered with the National Securities and Exchange Commission since October 1, 1934. It is a physical place where trading takes place and prices are set by a number of specialists who fairly set and evaluate the value of the stocks on the market. All companies with stocks for sale on the NYSE have very strict rules and regulations regarding behavior and disclosure of company information. -Electronic Market- this is a market with a completely different concept, that has emerged with the latest technology and insurgence of internet companies into the investing arena. The most prominent electronic market is known as NASDAQ and is not a physical place like the NYSE, but rather an electronic network where stocks are traded. In this market, stock prices are set by negotiations between buyers and sellers. Initial Public Offering: An initial public offering, or IPO, is a term which refers to the point in time when a new company chooses to "go public.” Essentially, the young company is in need of capital to start up their business and begin reaping profits from their ideas and their hard work. The company decides to offer a part of their company to the public in the form of shares, that will ultimately allow the company to acquire the funding it needs and investors to now take part ownership in the venture. Well, I almost feel like my head is spinning from all of this new information regarding stocks, but I felt it was important to dig a bit further into stock investments not only because they are a popular form of working toward a secure financial future for women and men, but also because the stock markets offer us such a clear indication of how our country’s overall economy is faring. There isn’t a single day that goes by that I don’t hear something about the market dropping or stocks decreasing in value because companies haven’t met their quarterly predictions on profits…so I wanted to find out a little more information on this subject to share with those of you who are choosing to learn about investing along with me. I hope that someone out there has found this to be beneficial and perhaps will give them an increased sense of knowledge and security when it comes to approaching these delicate and often times confusing topics. I am a firm believer that with knowledge comes power…and when we as women can acquire the knowledge, we are only empowering ourselves for the future. Until next time…thanks for reading! ***Disclaimer: This information is provided as an Epinion for this web site, and constitutes my own research and opinion. I could not have offered the wide array of facts and statistics without the help of various sources including Suze Orman’s fantastic book “The Courage to be Rich,” the financial wizards at the Motley Fool web site (www.motleyfool.com), the web site of Cassandra’s Revenge, and the web site of the Women’s Financial Network (the latter two designed specifically to target women and investing). This information is in no way intended to take the place of a professional financial planner.  |
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