Stocks usually have higher short-term risk than bonds. Historically, equity markets have tended to move both up and down in a more dramatic manner on a day-to-day basis than traditional fixed income instruments. However, equities have historically produced the highest returns relative to other investment classes. An investment portfolio containing a mix of stocks, bonds and cash is one way to diversify your investments and plan for your future goals.
The Definition of a Stock
Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing.
Being an Owner
Holding a company's stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim (albeit usually very small) to everything the company owns. Yes, 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.
A stock is represented by a stock certificate. This is a fancy piece of paper that is proof of your ownership. In today's computer age, you won't actually get to see this document because your brokerage keeps these records electronically, which is also known as holding shares "in street name". 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, trading with a click of the mouse or a phone call makes life easier for everybody.
Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business. Instead, one vote per share to elect the board of directors at annual meetings 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. In the same line of thinking, being a shareholder of Anheuser Busch doesn't mean you can walk into the factory and grab a free case of Bud Light!
The management of the company is supposed to increase the value of the firm for shareholders. If this doesn't happen, the shareholders can vote to have the management removed, at least in theory. In reality, individual investors like you and I don't own enough shares to have a material influence on the company. It's really the big boys like large institutional investors and billionaire entrepreneurs who make the decisions.
For ordinary shareholders, not being able to manage the company isn't such a big deal. After all, the idea is that you don't want to have to work to make money, right? The importance of being a shareholder is that you are entitled to a portion of the company’s profits and have a claim on assets. Profits are sometimes paid out in the form of dividends. The more shares you own, the larger the portion of the profits you get. Your claim on assets is only relevant if a company goes bankrupt. In case of liquidation, you'll receive what's left after all the creditors have been paid. This last point is worth repeating: the importance of stock ownership is your claim on assets and earnings. Without this, the stock wouldn't be worth the paper it's printed on.
Another extremely important feature of stock is its limited liability, which means that, as an owner of a stock, you are not personally liable if the company is not able to pay its debts. Other companies such as partnerships are set up so that if the partnership goes bankrupt the creditors can come after the partners (shareholders) personally and sell off their house, car, furniture, etc. Owning stock means that, no matter what, the maximum value you can lose is the value of your investment. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets.
Debt vs. Equity
Why does a company issue stock? Why would the founders share the profits with thousands of people when they could keep profits to themselves? The reason is that at some point every company needs to raise money. To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock. A company can borrow by taking a loan from a bank or by issuing bonds. Both methods fit under the umbrella of debt financing. On the other hand, issuing stock is called equity financing. Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way. All that the shareholders get in return for their money is the hope that the shares will someday be worth more than what they paid for them. The first sale of a stock, which is issued by the private company itself, is called the initial public offering (IPO).
It is important that you understand the distinction between a company financing through debt and financing through equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal) along with promised interest payments. This isn't the case with an equity investment. By becoming an owner, you assume the risk of the company not being successful - just as a small business owner isn't guaranteed a return, neither is a shareholder. As an owner, your claim on assets is less than that of creditors. This means that if a company goes bankrupt and liquidates, you, as a shareholder, don't get any money until the banks and bondholders have been paid out; we call this absolute priority. Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn't successful.
Risk
It must be emphasized that there are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many others do not. And there is no obligation to pay out dividends even for those firms that have traditionally given them. Without dividends, an investor can make money on a stock only through its appreciation in the open market. On the downside, any stock may go bankrupt, in which case your investment is worth nothing.
Although risk might sound all negative, there is also a bright side. Taking on greater risk demands a greater return on your investment. This is the reason why stocks have historically outperformed other investments such as bonds or savings accounts. Over the long term, an investment in stocks has historically had an average return of around 10-12%.
Source from: investopedia.com
Showing posts with label assets. Show all posts
Showing posts with label assets. Show all posts
2009-03-07
52 Must Read Quotes from Legendary Investor - Warren Buffett
Undoubtedly, Warren Buffett is the most successful investor of our time (and possibly of all time). His savvy deal making abilities coupled with his creative and cheerful personality allowed him to achieve success like no other. So it's really no luck that he's named the wealthiest man of 2008 The following is the comments made by Mr. Buffett that truly show off his knowledge! Maybe we can learn something from these quotes.
1. A public-opinion poll is no substitute for thought.
2. Chains of habit are too light to be felt until they are too heavy to be broken.
3. I always knew I was going to be rich. I don't think I ever doubted it for a minute.
4. I am quite serious when I say that I do not believe there are, on the whole earth besides, so many intensified bores as in these United States. No man can form an adequate idea of the real meaning of the word, without coming here.
5. I buy expensive suits. They just look cheap on me.
6. I don't have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It's like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GNP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don't do that though. I don't use very many of those claim checks. There's nothing material I want very much. And I'm going to give virtually all of those claim checks to charity when my wife and I die.
7. I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.
8. I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
9. If a business does well, the stock eventually follows.
10. If past history was all there was to the game, the richest people would be librarians.
11. If you're in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.
12. In the business world, the rear view mirror is always clearer than the windshield.
13. Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.
14. It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.
15. It's better to hang out with people better than you. Pick out associates whose behavior is better than yours and you'll drift in that direction.
16. It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
17. I've reluctantly discarded the notion of my continuing to manage the portfolio after my death - abandoning my hope to give new meaning to the term 'thinking outside the box.'
18. Let blockheads read what blockheads wrote.
19. Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.
20. Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases
21. Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.
22. Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.
23. Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.
24. Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.
25. Only when the tide goes out do you discover who's been swimming naked. 26. Our favorite holding period is forever.
27. Price is what you pay. Value is what you get.
28. Risk comes from not knowing what you're doing.
29. Risk is a part of God's game, alike for men and nations.
30. Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
31. Wall Street is the only place that people ride to work in a Rolls Royce to get advice from those who take the subway.
32. The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.
33. The investor of today does not profit from yesterday's growth.
34. The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities - that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future - will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands.
35. The only time to buy these is on a day with no "y" in it.
36. The smarter the journalists are, the better off society is. For to a degree, people read the press to inform themselves-and the better the teacher, the better the student body.
37. There are all kinds of businesses that Charlie and I don't understand, but that doesn't cause us to stay up at night. It just means we go on to the next one, and that's what the individual investor should do.
38. There seems to be some perverse human characteristic that likes to make easy things difficult.
39. Time is the friend of the wonderful company, the enemy of the mediocre.
40. Value is what you get.
41. We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.'
42. We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely.
43. We enjoy the process far more than the proceeds.
44. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
45. We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children. 46. When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
47. Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
48. Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful".
49. Wide diversification is only required when investors do not understand what they are doing.
50. You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing.
51. You only have to do a very few things right in your life so long as you don't do too many things wrong.
52. Your premium brand had better be delivering something special, or it's not going to get the business
1. A public-opinion poll is no substitute for thought.
2. Chains of habit are too light to be felt until they are too heavy to be broken.
3. I always knew I was going to be rich. I don't think I ever doubted it for a minute.
4. I am quite serious when I say that I do not believe there are, on the whole earth besides, so many intensified bores as in these United States. No man can form an adequate idea of the real meaning of the word, without coming here.
5. I buy expensive suits. They just look cheap on me.
6. I don't have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It's like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GNP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don't do that though. I don't use very many of those claim checks. There's nothing material I want very much. And I'm going to give virtually all of those claim checks to charity when my wife and I die.
7. I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.
8. I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
9. If a business does well, the stock eventually follows.
10. If past history was all there was to the game, the richest people would be librarians.
11. If you're in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.
12. In the business world, the rear view mirror is always clearer than the windshield.
13. Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.
14. It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.
15. It's better to hang out with people better than you. Pick out associates whose behavior is better than yours and you'll drift in that direction.
16. It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
17. I've reluctantly discarded the notion of my continuing to manage the portfolio after my death - abandoning my hope to give new meaning to the term 'thinking outside the box.'
18. Let blockheads read what blockheads wrote.
19. Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.
20. Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases
21. Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.
22. Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.
23. Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.
24. Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.
25. Only when the tide goes out do you discover who's been swimming naked. 26. Our favorite holding period is forever.
27. Price is what you pay. Value is what you get.
28. Risk comes from not knowing what you're doing.
29. Risk is a part of God's game, alike for men and nations.
30. Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
31. Wall Street is the only place that people ride to work in a Rolls Royce to get advice from those who take the subway.
32. The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.
33. The investor of today does not profit from yesterday's growth.
34. The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities - that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future - will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands.
35. The only time to buy these is on a day with no "y" in it.
36. The smarter the journalists are, the better off society is. For to a degree, people read the press to inform themselves-and the better the teacher, the better the student body.
37. There are all kinds of businesses that Charlie and I don't understand, but that doesn't cause us to stay up at night. It just means we go on to the next one, and that's what the individual investor should do.
38. There seems to be some perverse human characteristic that likes to make easy things difficult.
39. Time is the friend of the wonderful company, the enemy of the mediocre.
40. Value is what you get.
41. We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.'
42. We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely.
43. We enjoy the process far more than the proceeds.
44. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
45. We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children. 46. When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
47. Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
48. Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful".
49. Wide diversification is only required when investors do not understand what they are doing.
50. You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing.
51. You only have to do a very few things right in your life so long as you don't do too many things wrong.
52. Your premium brand had better be delivering something special, or it's not going to get the business
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