Understanding the Stock Market - A Dummy's Overview [stocksmarketarticles]

Understanding the Stock Market - A Dummy's Overview [stocksmarketarticles]

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•Price to book ratio. This ratio is one of the favorites of academics. Academic research has shown correlation between stocks' price-to-book ratios and their risk and returns. Investors who like to buy stocks with low price-to-book ratios are typically ... Ask Matt: How can I avoid overpaying for a stock?

When understanding the stock market, the first thing you need to understand is stocks. A share of stocks is the smallest unit of ownership in a company. If you own a share of stocks, you are part owner of the company. You have the right to vote on relevant matters pertaining to the company and when the company distributes profits to shareholders, you will receive a proportionate share; this will be further explored later. A unique characteristic of stock ownership is limited liability. If, for instance, the company loses a lawsuit and must pay a substantial judgment, the worse that can befall you is that your stock can become worthless; the creditors can't pursue your personal assets. There are two types of stock, common and preferred. Common stock represents most of the stock held by the general public; it has voting rights and the right to earn dividends.

When you hear about a stock being 'up or down,' it is a common stock. Preferred stock has fewer rights than common stock, except in the area of dividends. Companies that issue preferred stock usually pay consistent dividends, and preferred stock has first call on dividends over common stock.

Next, the term investment. Investment is the vehicle that drives the stock market. It is the proactive use of your money to make more money. Your focus of investing is on returns and can run from conservative to very aggressive in terms of risk. You measure results in terms of returns weighted against anticipated risks. As you invest, you make money in two ways; an increase in share price resulting from the market valuing increased profits as a result of expansion in the business or share repurchases, which make each share represent greater ownership in the business as a percentage of total equity.

Dividends are profits paid out to you. They are your property in that you can do as you please with them, reinvesting or spending. You can, however, sell your stock to someone else, but over the long run, your returns are linked to the company's performance.

Finally, you may ask, where do you trade these stocks? The answer is the 'stock market.' The stock market is a marketplace where buyers and sellers meet. The item being traded is a piece of paper representing ownership of the company in case. The price of the stock will dynamically fluctuate during trading hours in direct relationship to supply and demand. When buyers and sellers physically come together to trade, it is the stock exchange, such as the New York Stock Exchange. However, when the exchange is totally electronic, lacking physical presence, it is called over the counter stock market trading, such as the NASDAQ.

If trading is right for you, always be prepared, knowledge is money in the long run and understanding the stock market is one of the most critical things you can do before jumping into investing.

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