| Overview | Investing Options| Research Basics | Type of Orders |
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Stocks, shares, equities, and funds: These terms have specific meanings every investor should know so that they can do the appropriate research before committing money to any investment vehicle. Here's an overview of some common types of investments, what they are and how they work.
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| Stocks |
| Stock are bought and sold in shares. A shareholder has % ownership (albeit a fraction) in a company. For this reason, stocks are often called "equities". An investor can make money from stocks in two ways: dividends and capital gain. Dividends are checks that shareholders get, usually every quarter, as their share of the company's profits. The company's board of directors determines the dividend paid, but it usually doesn't change very often. Not all companies pay dividends, some companies reinvest dividends in the corporation. This is called “retained earnings or profits”. Capital gains are realized when an investor sells shares at a higher price than what he originally paid for them. There are three main categories of stocks: Capital, common, and preferred. Within these three categories, there are five basic types: Income, blue chip, growth, cyclical, and defensive. |
| Categories of Stock |
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Common stocks are the most common kind of stock. Common stockholders are not guaranteed dividends, but they may receive dividends during the company's prosperous periods. If a company fails or liquidates, common stockholders are paid after bondholders and preferred stockholders. Common stockholders assume the greater risk, but because they have voting rights at the company's annual stockholders' meeting, generally exercise greater control and may gain greater reward in the form of dividends and capital appreciation.
Preferred stocks pay a fixed dividend regardless of corporate earnings and have priority over common stock in the payment of dividends. Preferred stockholders also have priority over common stockholders in recouping their investment if the company fails or liquidates. However, preferred stock carries no voting rights and, should earnings rise significantly, the preferred holder receives the same fixed dividend while holders of common stock may collect more. The fixed income stream of preferred stock makes it similar in many ways to bonds.
Capital stocks include both preferred and common stocks. The terms common stock and capital stock are often used interchangeably when a company has no preferred stock.
American Depositary Receipts or ADRs are receipts issued by a U.S. depositary bank that represent shares of a foreign corporation held by the bank. Because ADRs are quoted in U.S. dollars and trade just like any other stock, they make it simple for investors to diversify their holdings internationally.
NYSE Global Shares® are ordinary shares of a non-U.S. company that trade in the same form on any market in the world. Global Shares are tracked in a single global registry, and trade in the home currency of each market.
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| Types of Stock |
Income stocks pay unusually large dividends that can be used to generate income without selling the stock. However, the price of income stocks generally does not rise very quickly.
Blue chip stocks usually pay small but regular dividends and maintain a fairly steady price throughout market ups and downs. Very solid and reliable companies with long histories of consistent growth and stability issue blue chip stocks.
Growth stocks normally pay little or no dividend because the company needs all of its earnings to finance expansion. Growth stocks are issued by young, entrepreneurial companies that are experiencing a faster rate of growth than their general industries. Because these companies have no proven track record, growth stocks are riskier than other types of stocks but also offer more appreciation potential.
Cyclical stocks tend to go down in price during recessionary periods and up during economic booms. Companies in industries that are affected by general economic trends (such as automobile, heavy machinery and home building) issue cyclical stocks.
Defensive stocks are the opposite of cyclical stocks. Defensive stocks, issued by companies producing staples such as food, beverages, drugs, and insurance, typically maintain their value during recessionary periods. |
| Bonds |
A bond is basically an I.O.U. or promissory note of a corporation or municipality, usually issued in multiples of $1,000 or $5,000.
A bond is evidence of a debt on which the issuing company usually promises to pay the bondholder a specified amount of interest for a specified length of time, and to repay the loan on the expiration date.
A bondholder is a creditor of the corporation. Unlike a shareholder, a bondholder is not a partial owner of the company.
The NYSE conducts bond trading operations through its Automated Bond System (ABS)® . |
| Funds |
| In most cases, a fund is a collection of stocks that are pooled for specific purposes (although there are also bond funds). Mutual fund and Exchange-Traded Funds are common types of stock funds. |
| Mutual Funds |
Mutual funds pool money from all their investors and buy different stocks with it. The risk and reward from all of the stocks is shared by all of the investors.
This is a way for investors to diversify their risk and own many stocks for not a lot of money. The most common way for individuals to invest in the stock market is through mutual funds.
Many people invest in mutual funds through an employer-sponsored 401(k) investment account meant for retirement. Often employees can decide how to invest the money in their accounts, generally by choosing from a list of mutual funds.
There are all kinds of mutual funds, including index funds that track different types of stocks, and more specialized funds that invest in certain industries or use certain strategies.
Bond funds, balanced funds, general equity fund, global funds and sector funds are also types of mutual funds. |
| Exchange-Traded Funds |
Similar to a regular index fund, an exchange-traded fund (ETF) owns a basket of stocks that mirrors the composition of a market index, such as the Dow Jones Industrial Average or the Standard & Poor's 500.
ETF shares are purchased in the same way that stock is purchased: not from a fund company, but on a stock exchange, with the help of a broker who charges a commission. |
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