What is a Stock?
A Stock or a Share is a part ownership of the company that is traded publicly in the Stock market. For example, “Company A” has 100,000 shares and you own 1000 shares. This makes you 1 percent owner of the “Company A”. Each share gives you the part ownership right to the company. This means that you have a claim on the assets and earnings of the company. You even vote to appoint the board members and the management.
What is a Bond?
A Bond represents a loan that the investor has made to the borrower. These borrowers may be Corporations, Municipalities or States or the U.S. government itself. These borrowers make interest payments to the bondholders usually twice a year. Each bond has a duration which can be short-term for a couple of years to long-term for 30 years as well. When the bond completes its duration, it matures and this date is called the Maturity date. The investor will get back his principal on this date.
What are Securities?
Financial Assets that can be traded (bought and sold) are called Securities. These are of two types – Debt securities (Bonds) or Equity securities (Stocks).
What is the Stock Market?
Stock market is where the securities are sold and bought. The first time a company sells its shares to the public is called an Initial Public Offering (IPO). After the IPO, the buyers and sellers trade these shares on the Stock market within themselves.
What are Stock Market Indices?
There are different indexes which are basically a collection of companies grouped together by some criteria like the Dow Jones Industrial Average (DJIA) or the NASDAQ or the S&P 500. Depending on the economic performance of the companies in the index, the indices go up or down any given day.
Who participates in the Stock Market?
Retail and Institutional Investors. Retail investors are regular people like you and me. Institutional investors are Pension funds, Mutual funds, Hedge funds and they invest large sums of money on others behalf.
Who sets the price of the Stocks?
During the IPO, an investment bank which takes a company public, values the company based on its existing finances and the demand for the products or services and the long-term growth prospects of the company and sets an initial price. This is the primary offering. After the launch of the IPO, the buyers and sellers set the price based on the demand and supply. This is the secondary offering.
Who oversees the Stock Market?
The Securities and Exchange Commission (SEC) is an organization that was created by the U.S. Government by passing the Securities Act of 1933 and Securities Exchange Act of 1934.
Why should I invest in the Stock Market?
You either invest for the dividends or the capital gains. When you buy stocks, you become part owner of the company and there are two ways to profit from this. The companies give dividends to the shareholders. Dividends are a share from the earnings of the company which are paid quarterly per share. This provides a source of income for the investor. If the company does well financially and grows into new markets with their products and services, the value of the company goes up. When this happens, the Stock price goes up as well. This is called Capital gains.