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Stocks (Equities)
Owning a Share of a Company
When you buy stock, you're purchasing part of a company and becoming one of the owners. You may buy stock if you expect the:
• Stock's value may increase
• Corporation may pay out a portion of its profits in the form of dividends
Supply and Demand Determines Price
The price of the stock moves up and down depending on how much you and other investors are willing to pay for it at the time.
Investors' expectations of the company, including earnings, revenues and assets, help drive the upward and downward movement of the stock's price. And just like supply and demand, when more investors want to buy a particular company's stock, that stock's price increases. And when more investors want to sell a stock, the stock's price falls.
Types of Stock
There are two main types of stock: common stock and preferred stock. Common stock is what people generally refer to when they discuss stock.
Preferred stock, on the other hand, is somewhat bond-like and can be considered to be more of a fixed-income investment because it normally offers a fixed, quarterly dividend. It's considered "preferred" because its dividend must be paid before dividends on common stock can be paid to shareholders. Preferred stocks normally pay higher dividends than common stock, providing yields that are comparable to bonds, and their prices tend to fluctuate with interest rates.
Categories of Stock
Stocks can be categorized in a variety of ways. Here are just a few:
• U.S. large-cap stocks. Stocks of U.S. companies with a total value of outstanding shares greater than $10 billion.
• U.S. mid-cap U.S. stocks. Stocks of U.S. companies with a total value of outstanding shares between $2 billion and $10 billion.
• U.S. small-cap U.S. stocks. Stocks of U.S. companies with a total value of outstanding shares less than $2 billion.
• International developed-country stocks. Stocks of companies based in wealthy countries with highly developed financial markets.
• International emerging-market stocks. Stocks of companies based in relatively poor but growing countries, which typically have less-developed financial markets.
Ways to Purchase Stock
Stocks can be purchased individually (meaning you purchase shares of stock in one particular company) or as part of a pool investments, such as mutual funds and defined portfolios.
Mutual funds are baskets of stocks that are available for the fraction of the price you would need to buy the same stocks individually. That's because a large number of investors pool their money together and invest in the entire portfolio of stocks.
Professional money managers direct the investments within mutual funds, choosing each of the individual investments based on the mutual fund's investment goals. For example, some stock mutual funds invest in well-established companies that pay regular dividends. Others invest in younger, more growth-oriented firms or companies that have been operating below expectations for several years.
Stock defined portfolios are professionally selected and supervised investment portfolios in which investors own proportional shares of the stocks that are held within it. The holdings of the stock defined portfolio are generally fixed.
Note: As with the purchase of individual stocks, your investment return and principal value of an investment in mutual funds and defined portfolios will fluctuate. Your shares may be worth more or less than your original investment when redeemed.
For More Information
Contact your Financial Advisor if any of these investments interest you or if you'd like more information about how stocks work and the role they can play in your investment portfolio.