Understanding the Stock Market

Section I Investing In Common Stocks A corporation is a company that is a separate legal entity owned by stockholders. In other words, the corporation functions like a single person separate from its owners (stockholders). Thus, the stockholders have limited liability, (the investment in the stock they own). Common stock represents ownership in a corporation. When you buy common stock, you are buying the corporation's factories, buildings, and products. Common stock is sold in shares. Each share of common stock represents the basic unit of ownership of the corporation. Stock is like a Pizza, each share of stock represents an equal piece of the pie (company). Shares Price appreciation occurs when you sell your stock for more than you paid

for the stock. Dividends are the portion of a corporation’s profit that is paid to shareholders. As the company grows, your piece of the pie grows as well. If the company is successful and grows by 25%, the value of your shares will grow as well. Dividends are paid out of a corporation's profit after taxes have been paid. The corporation can, however, retain part of the profit and reinvest it in the corporation. This portion is known as retained earnings and it is frequently used for research and development or expansion. A corporation doesn't have to pay dividends. Dividends do not even have to be paid with money. The board of directors can elect to issue stock dividends. When this is done, the current stockholders would receive more shares of the corporation's stock rather than cash. When investors sell stocks for more than they paid, the profit made from the sale is the investor's capital gain. When a stock sells for less than the investor paid for it, the investor suffers a capital loss. The money an investor uses to buy stocks is called equity capital. Because you can make or lose money through investments, you must determine the amount of money that you can afford to lose without harming your standard of living. The amount of money an investor can afford to lose is called risk capital, and that is the amount that should be invested. Remember, invest only what you can afford to lose. Corporations may be classified in many ways. If stock is available for purchase by the public, it is an open corporation. The corporation is required by law to disclose its financial condition. Most large corporations are open corporations. A closed corporation is one whose stock is not available to outsiders, it does not issue stock to the public and is not required to disclose publicly its financial condition. All corporations must issue stock. The state issuing the Articles of Incorporation authorizes the number of shares a corporation can issue. That number represents all the shares a corporation can issue without going back to the state and requesting that the state allow more shares to be issued. These are the shares of stock that the company has sold (issued). The issued shares represent ownership. Authorized but not issued are held for future sales to raise funds (capital) for future growth. When a company wants...

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