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What Are
Stocks?
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What are the advantages & disadvantages of Stocks?
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Different kinds of Stock
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How and where do Stocks trade?
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What
causes stock prices to change?
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How to open a brokerage account
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What are DRIPs?
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How to place orders to buy and sell Stocks
What are
Stocks?
Stocks are one of the
greatest tools ever invented for building wealth. Stocks are a part, if not the
cornerstone, of nearly any investment portfolio. When you start on your road to
financial freedom, you need to have a solid understanding of stocks and how they
trade on the stock market. Here is question to think about! 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.
Holding a company's stock means that you are one of the many owners,
shareholders
or stockholders
of a company, and, as such, you have a claim to
everything the company owns. This means that technically you own a tiny
sliver of every piece of furniture, every trademark, and every contract of
the company. As an owner, you are entitled to your share of the company's
earnings as well as any voting rights attached to the stock. As you acquire
more stock, your ownership stake in the company becomes greater.
A stock is represented by a stock certificate. This is a fancy piece of
paper that is proof of your ownership. In today's society, you can choose to
keep your stocks in "street name"
instead of a stock certificate. Your brokerage will keep your ownership record
electronically. This is done to make the shares easier to trade. In the
past when a person wanted to sell his or her shares, that person physically
took the certificates down to the brokerage. Now, you can trade with a click of
the mouse or a phone call makes life easier for everybody.
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Being a shareholder of a public company does not mean you have a say in the
day-to-day operation of the business. Instead, shareholders elect
board of
directors at annual meetings which in turns make decisions on major
company issues and controls when dividends will be paid to stockholders. That is the extent to which you have a say in
the company. For instance, being a Microsoft shareholder doesn't mean you
can call up Bill Gates and tell him how you think the company should be run.
Also just because you are a shareholder of Best Buy doesn't
mean you can walk into the store and grab a free CD or a DVD!
Why should you invest in
stocks?
Your money and your retirement
savings are sacred, so you don't want to take crazy risks. But that doesn't
mean you should rely solely on such safe investments as bank CDs and
money-market funds. To build a nest egg large enough to see you through
retirement, which may last 30 years or more, you'll need the growth that
stocks provide.
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What is
an ADR?
American
depositary receipt or ADR a stock that trades in the United
States but represents a specified number of shares in a foreign
corporation. Shares of hundreds of major overseas-based companies,
including well-known names such as British Petroleum, Gucci Group,
Sony, and Toyota, are traded as ADRs on US stock markets in US
dollars. ADRs are actually receipts issued by US banks that hold
actual shares of the companies' stocks. ADRs let you diversify
into international markets without having to purchase shares on
overseas exchanges or through mutual funds. |
Over the past 200 years, stocks have posted an average annual return of just
over 11 percent versus just over 5 percent for bonds. Given stocks' superior
returns, some financial advisers recommend that if your retirement is still
20 years or more away put a large share of your portfolio in stocks and
stock funds. Of course, a 100 percent stock portfolio can give you some
hair-raising moments. In the 1973-74 bear market, for example, U.S. stocks
lost 43 percent of their value and took three-and-a-half years just to get
back to where they started. And who knows when stocks will get back to the
highs reached in early 2000? But history has shown that, it eventually comes
back up and more. It just takes time, that's why when you invest in stocks
it must be for the long-term. Otherwise, volatility will kill you.
If you don't have the stomach for such a steep downturn, a more prudent
course is to throw some bonds into the mix. Putting 70 percent of your
portfolio into stocks and 30 percent into bonds, for example, will let you
capture most of the long-term growth of stocks while sheltering your
investments somewhat during meltdowns. As you approach retirement age, the
idea is to shift more into bonds. But even in retirement, which can last 20
or 30 years (or more), it pays to maintain a healthy dose of stocks (maybe
upwards of 50 percent in your seventies, and up to 30 percent in your
eighties).
The chart below to compare the
return on investment with the long-term growth of your initial investment.
If you would have
invested $10,000 for 25 years or 40 years:
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You'll Have This Much |
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Return On Investment |
In 10 Years |
In 25 Years |
In 40 Years |
| 0% (Mattress) |
$10,000 |
$10,000 |
$10,000 |
| 3% (savings account) |
$13,494 |
$21,150 |
$33,151 |
| 5% (bond) |
$16,470 |
$33,863 |
$70,399 |
| 11% (stocks and real estate) |
$29,891 |
$154,478 |
$798,345 |
***You can't earn good returns on
your money if you keep your money under the mattress. When you do
invest in growth investments such as stocks and real estate, don't follow
new investment after another trying to beat the market average returns.
Put your money in the market (Especially mutual funds) and just let it grow. Don't try to beat
the market.***
(See how much you'll have Financial Calculator) |
Next -->> What are
the advantages & disadvantages of stocks?
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