Types of stock
There are two types of stocks: common stock and preferred stock. Preferred stock holders differ from common stock holders in that they do not have voting rights but have a preferential claim to earnings and assets. In other words, preferred stock holders have to get paid before common stock holders.
Also, preferred stock holders receive dividend payments on a regular schedule while common stock holders receive dividends at variable intervals.
A stock broker is a person usually employed by a brokerage which acts as an intermediary between investors and companies. Because many wannabe investors have little genuine financial knowledge, brokers are there to advise and to act on behalf on their clients.
Brokers make profits off commissions on sales, when they complete a transaction for you, so you should beware that their intentions may not always be honest. When choosing a broker you should go with someone who has a very good reputation.
Control over companies you invest in
Although possession of stocks makes you one of the owners of a company, you may not have any say in how the company gets run unless you are one of the largest shareholders or you get elected to the board of directors. Companies are run on a day to day basis by a CEO and a management team who are supervised by the board of directors.
The maximum involvement of the average stockholder is usually to participate in the election of the board.
How to value stocks
There are numerous formulas for the valuation of stocks but you may not need to know these if you have a broker acting for you. What you do need to know about stock valuation are the two most basic measures upon which all other formulas are derived: the book value of the company’s entire tangible and intangible assets and the amount of time it would take to recoup your investment at the current earnings rate, also called the price to earnings ratio.
The actual price of a stock is a reflection of the book value of the company itself and of the market valuation of the stock. Stocks are sold in an auction styled market where the highest bidders wins; this tends to drive up stock prices particularly if investors think a particular stock could be financially attractive.
Companies may decide not to pay dividends to common stock holders
Many people assume that companies have to pay a portion of their profits to investors annually; in reality this is not the case. The board of directors has the power to determine whether dividends should be paid to common stockholders or not.
Stock Market Investment Strategies
There are three major investment strategies.
Buy and Hold
This strategy refers to investors who typically buy stocks in order to keep them for life. Such investors will usually prioritize the earning capacity of a stock when investing.
Typically, growth investors invest in cheap stocks whose value they expect to increase dramatically. When this happens they can then sell their shares for a significant profit.
Value investors may invest in companies whose stocks are undervalued by the market. There is no single accepted definition of value though so this will depend on the perspective of the investor.