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Frequently Asked Questions (FAQs) on Stocks
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What is stock?
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Are stocks guaranteed?
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Are there different kinds of equities?
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What's the difference between common and
preferred stock?
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Are certain common stocks riskier than
others?
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Is common stock riskier than preferred
stock?
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What exactly is a blue-chip stock?
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What is stock?
A share of stock is evidence of ownership in a corporation. Wouldn't
you love to be an owner of a business without ever having to show up
at work or having to deal with all the headaches of running a
company? Well you can. How? By owning stocks because behind every
stock is a business, company or corporation. Look around your
neighborhood and you'll see all kinds of stocks. McDonald, for
example is in the fast food industry. Disney is in the entertainment
business and Best Buy is in retail. You can own a piece of those
company and enjoy the profit they generate by investing in their
stocks.
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Are stocks guaranteed?
No, they're not. They are always unsecured, which means they are not
backed or guaranteed by specific corporate assets.
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Are there different kinds of equities?
There are two types of equity securities: common stock and preferred
stock. All corporations issue common stock, but they don't have to
issue preferred stock.
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What's the difference between common and
preferred stock?
When people talk about stocks in general they are most likely
referring common stock. Common stock is the first security a
corporation issues. Common shares represent ownership in a company
and ties the investor's fortunes to the company. It usually entitles
the holder (owner) to vote in the election of directors, and it has
the greatest management control in matters of capitalization, etc.
Common stock generally offers the greatest overall rate of return for
hits holder, but it participates in earnings after the claim
of other securities and, for this reason, has greater risk.
Preferred stock also represents
ownership, but it generally carries no voting rights. It has a
fixed dividend and takes preference over common stock. This means
that dividends are paid to preferred stock holders first. Then, if
cash is still available, dividends are paid to common stockholders.
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Are certain common stocks riskier than
others?
Yes! Stocks of young, growth-oriented companies tend to be riskier
than those of the so-called blue-chip companies, which have
established themselves over good and bad business and economic
cycles. Younger, riskier stocks generally pay little or no dividend
because the companies often choose to reinvest that money in
expansion, equipment, and research and development. Of course, along
with the risk comes the possibility of rapid growth.
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Is common stock riskier than preferred
stock?
Absolutely.
Common stock yields higher
returns than almost every other investment over the long-term horizon. This higher return comes at a cost
since common stocks entail the most risk. If a company goes bankrupt and
liquidates, the common shareholders will not receive money until the creditors,
bondholders, and preferred shareholders are paid.
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What exactly is a blue-chip stock?
The term blue chip comes from the game of poker-- blue chips have the
greatest value. Blue-chip stocks are companies known nationally for
the quality of its products or services, its reliability, and its
ability to operate profitably in good and bad economic times. These
stocks can sometimes be classified as growth stocks such as Coca-Cola
and American Express. They tend to generate decent dividend income
with some growth. Since provide a combination of growth and income,
some blue chip stocks can also be considered Growth and income stocks.
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