Stock Market Basics: The American Guide to Money and Investing

By Derek B. Davis, LSRA

Welcome to Stock Market Basics, the second in a series of books designed to help you master the fundamentals of money and investing. Whether you're just starting your journey toward understanding money and investing or perhaps seeking to deepen your understanding, this series is designed to empower you with the knowledge and skills needed to navigate all complexities.

 

Financial literacy is more crucial than ever. Unfortunately, many individuals find themselves overwhelmed by the myriad of financial decisions they face daily.  From budgeting and saving to investing and planning for the future, the world of finance can often seem daunting and confusing.  That is where this book series comes in. Drawing upon years of experience studying money and investing, each book in this series is crafted to provide you with clear, practical guidance on key financial topics.

 

Financial literacy is not just about understanding numbers; it is about gaining the confidence and competence to make informed decisions that support your financial well-being.  We hope that this series will serve as a trusted resource and companion on your quest for investing success.  Thank you for choosing to embark on this journey with us and Cheers to a brighter financial future ahead!

• Language: English
• Publisher: Derek B. Davis, LSRA
• Release date: Jun 23, 2024
• ISBN: 9798227801081

Book preview

Copyright © 2024 Prideful Publications

All rights reserved

The characters and events portrayed in this book are fictitious. Any similarity to real persons, living or dead, is coincidental and not intended by the author.

No part of this book may be reproduced, or stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without express written permission of the publisher.

Cover design by: Art Painter

Library of Congress Control Number: 2018675309

Printed in the United States of America

Dad loves you, Miller and Katherine!

Contents

Copyright

Dedication

Preface

CHAPTER ONE: What are stocks?

CHAPTER TWO: Common Stocks

CHAPTER THREE: Preferred Stocks

CHAPTER FOUR: Classes of Stock

CHAPTER FIVE: Stock Splits and Reverse Stock Splits

CHAPTER SIX: Voting as a Stockholder

CHAPTER SEVEN: Determining Value

CHAPTER EIGHT: Cyclical Stocks

CHAPTER NINE: Capital Gains

CHAPTER TEN: Stock Certificates

CHAPTER ELEVEN: Initial Public Offerings (IPOs)

CHAPTER TWELVE: Selling Direct and Secondary Offerings

CHAPTER THIRTEEN: Buyers of Stock

CHAPTER FOURTEEN: Market Capitalization

CHAPTER FIFTEEN: The Stock Buying Process

CHAPTER SIXTEEN: Brokerage Commissions

CHAPTER SEVENTEEN: Short Selling

CHAPTER EIGHTEEN: Buying on Margin

CHAPTER NINETEEN: Stock Research

CHAPTER TWENTY: Reading Stock Tables

CHAPTER TWENTY-ONE: Earnings and Dividend Reports

CHAPTER TWENTY-TWO: The Stock Markets

CHAPTER TWENTY-THREE: Averages and Indexes

CHAPTER TWENTY-FOUR: Bull vs. Bear

CHAPTER TWENTY-FIVE: Market Crashes

CHAPTER TWENTY-SIX: Day Trading

CHAPTER TWENTY-SEVEN: Conclusion

Preface

Welcome to Stock Market Basics, the second in a series of books designed to help you master the fundamentals of money and investing.

Whether you're just starting your journey toward understanding money and investing or perhaps seeking to deepen your understanding, this series is designed to empower you with the knowledge and skills needed to navigate all complexities.

Financial literacy is more crucial than ever. Unfortunately, many individuals find themselves overwhelmed by the myriad of financial decisions they face daily.

From budgeting and saving to investing and planning for the future, the world of finance can often seem daunting and confusing. 

That is where this book series comes in. Drawing upon years of experience studying money and investing, each book in this series is crafted to provide you with clear, practical guidance on key financial topics.

Financial literacy is not just about understanding numbers; it is about gaining the confidence and competence to make informed decisions that support your financial well-being.  

We hope that this series will serve as a trusted resource and companion on your quest for investing success. 

Thank you for choosing to embark on this journey with us and Cheers to a brighter financial future ahead!

Stock Market Basics

The American Guide to Money and Investing

Volume II

Derek B. Davis, LSRA

CHAPTER ONE: What are stocks?

Stocks, also known as shares or equities, represent ownership in a corporation. When you purchase stock, you acquire a piece of the company, making you a shareholder. Stocks form the foundation of many investment portfolios and play a crucial role in the financial markets.

Stocks are financial instruments that signify partial ownership in a corporation and entitle the holder to a portion of the company’s profits and assets. There are two primary types of stocks: common stocks and preferred stocks.

Common Stocks:

Ownership and Voting Rights: Common stockholders own a portion of the company and typically have voting rights to elect the board of directors and influence corporate policy.

Dividends: They may receive dividends, which are payments made from a company's earnings. However, dividends are not guaranteed and can vary (Brealey, Myers, & Allen, 2017).

Capital Gains: Common stocks offer the potential for capital gains if the stock price increases over time.

Preferred Stocks:

Fixed Dividends: Preferred shareholders receive fixed dividends before common shareholders.

Priority: In the event of liquidation, preferred shareholders have a higher claim on assets than common shareholders.

Limited Voting Rights: Preferred stocks typically do not offer voting rights (Ross, Westerfield, & Jaffe, 2013).

Stocks that pay dividends regularly are known as income stocks.  Stocks that pay little or no dividend while reinvesting their profit are known as growth stocks.

How Stocks Work

When a company decides to raise capital, it can issue stocks through an Initial Public Offering (IPO). Post-IPO, these stocks are traded on stock exchanges such as the New York Stock Exchange (NYSE) or NASDAQ.

Investors buy and sell stocks through brokers, and prices fluctuate based on supply and demand, company performance, and broader economic factors.

Some terms of note:

Trading Stocks: Investors purchase and sell stocks through brokerage accounts. Prices are determined by market conditions (Bodie, Kane, & Marcus, 2014).

Earnings: Investors can earn money through dividends (if paid) and capital gains (selling stocks at a higher price than the purchase price).

Stock Exchanges: These platforms facilitate the buying and selling of stocks. Examples include NYSE, NASDAQ, and international exchanges like the London Stock Exchange (LSE).

Stocks are a popular investment vehicle due to several benefits:

Potential for High Returns: Historically, stocks have provided higher returns compared to other investment types, such as bonds or savings accounts (Siegel, 2002).

Dividend Income: Some stocks provide regular income through dividends, which can be reinvested or used as cash flow.

Liquidity: Stocks are highly liquid assets, meaning they can be quickly bought or sold in the market (Malkiel, 2015).

Ownership and Voting Rights: Owning stocks gives investors a stake in the company and a say in its governance.

While stocks offer substantial benefits, they also come with risks:

Market Volatility: Stock prices can fluctuate widely due to market conditions, economic factors, and company performance.

Potential for Loss: There is always the risk of losing the invested capital, especially if the company performs poorly or goes bankrupt (Fabozzi, 2014).

Dividends Are Not Guaranteed: Companies are not obligated to pay dividends, and they can be reduced or eliminated.

Stocks play a crucial role in the economy by enabling companies to raise capital and providing investors with opportunities to grow their wealth.

The stock market is often seen as a barometer of economic health, with rising stock prices indicating investor confidence and economic growth.

Capital Formation: By issuing stocks, companies can raise funds to invest in growth, innovation, and expansion (Ross, Westerfield, & Jaffe, 2013).

Economic Indicator: Stock market performance can signal economic trends. For instance, a bull market (rising stock prices) often suggests economic growth, while a bear market (falling stock prices) may indicate economic downturns.

Wealth Distribution: Stock ownership allows individuals and institutions to participate in the financial success of companies, contributing to wealth distribution in the economy (Bodie, Kane, & Marcus, 2014).

Stock exchanges provide a structured and regulated environment for trading stocks. They ensure transparency, liquidity, and fair pricing. Technology has transformed stock trading, making it more accessible and efficient for everyone.

Some key terms regarding stock exchanges:

Regulation: Exchanges are regulated by government bodies (e.g., the Securities and Exchange Commission in the U.S.) to protect investors and ensure fair trading practices (Fabozzi, 2014).

Market Makers: Entities that provide liquidity by being ready to buy and sell stocks at publicly quoted prices.

Indices: Stock exchanges use indices (e.g., the S&P 500, Dow Jones Industrial Average) to track the performance of a group of stocks, providing insights into market trends (Malkiel, 2015).

Investors employ various strategies to maximize returns and manage risks:

Buy and Hold: Long-term strategy where investors buy stocks and hold them for an extended period, betting on the overall growth of the company (Siegel, 2002).

Day Trading: Short-term strategy where investors buy and sell stocks within the same trading day, aiming to profit from small price fluctuations.

Value Investing: Investors seek undervalued stocks that they believe are priced lower than their intrinsic value (Graham, 2006).

Growth Investing: Focuses on stocks of companies expected to grow at an above-average rate compared to others.

Stocks are a fundamental component of the financial markets, providing companies with capital and investors with opportunities for wealth creation.

Understanding the different types of stocks, how they work, their benefits, risks, and their role in the economy is crucial for making informed investment decisions. While stocks offer the potential for high returns, they also come with significant risks, requiring careful analysis and strategic planning.

References

Aldridge, I. (2013). High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems. Wiley.

Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments (10th ed.). McGraw-Hill Education.

Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of Corporate Finance (12th ed.). McGraw-Hill Education.

Fabozzi, F. J. (2014). Bond Markets, Analysis and Strategies (9th ed.). Pearson.

Graham, B. (2006). The Intelligent Investor: The Definitive Book on Value Investing. Harper Business.

Malkiel, B. G. (2015). A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing. W. W. Norton & Company.

Perry, V. G., & Rehman, S. S. (2011). Globalization and the Digital Divide: The Roles of Financial and Human Capital. Springer.

Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate Finance (10th ed.). McGraw-Hill Education.

Siegel, J. J. (2002). Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies. McGraw-Hill.

CHAPTER TWO: Common Stocks

Common stocks are a type of equity security that represents ownership in a corporation. When investors purchase common stocks, they acquire a fractional share of the company, granting them certain rights and potential benefits.

Common stocks are equity securities that provide shareholders with partial ownership in a corporation.

This ownership entitles shareholders to several key rights and features:

Voting Rights: Common stockholders typically have the right to vote on significant corporate matters, including the election of the board of directors and major corporate policies (Brealey, Myers, & Allen, 2017).

Each share generally equates to one vote, allowing shareholders to influence the company’s direction.

Dividends: Although not guaranteed, common stockholders may receive dividends, which are portions of the company’s earnings distributed to shareholders.

Dividend payments depend on the company’s profitability and discretion of its board of directors (Ross, Westerfield, & Jaffe, 2013).

Capital Gains: Shareholders can benefit from capital gains if the stock’s market price increases over time. This potential for appreciation makes common stocks an attractive investment for growth-oriented investors (Bodie, Kane, & Marcus, 2014).

Residual Claim: In the event of liquidation, common stockholders have a residual claim on the company’s assets. This means they are paid after all debts and preferred stockholders have been settled (Fabozzi, 2014).

Investing in common stocks offers several potential advantages: