Stock Terms Definition

Introduction to Stocks

The right to vote - Owning stock gives you the right to vote on important company issues and policies such as whether a company should issue additional stock, sell itself to outside buyers or change the board of directors. In general, the more stock you own, the greater your voice in company decisions.

The way you vote - You can attend the company's annual meeting and vote in person. Or you can cast your vote by mail using a ballot called a proxy, vote by phone or sometimes online over the Internet.

The Value of Stock - A stock value can change at any moment, depending on market conditions, investor perceptions, or a variety of other issues. When investors are buying stock because they believe it is good investment, the stock increases in value. But if they think the company is doing poorly, they either will not invest or will sell shares they own. The value of the stock will fall.

Return On Investment (ROI) - Price is only one measure of the stock's value. ROI - the amount you earn on the stock - is another.

Cyclical Stocks are shares of companies that are highly dependent on the state of the economy. When the economy slows down, their earnings typically fall, and so does the stock price. But when the economy recovers, earnings rise and the stock price goes up.

Timing is Right - The trick to making money, of course, is to buy a stock before others want it and sell before they decide to unload. Getting the timing right means you have to pay attention to the following:

- The rate at which the company's earnings are growing
- Competitiveness of its product or service
- The availability of new markets
- Management strengths and weaknesses
- The overall economic environment in which a company operates

Capital Gain - is the profit you make on the sale of stock you own. Of course, you owe taxes on the gain as well as commission on the sale. Own the stock for more than a year - the gain becomes long-term - and you pay less tax.

Capital Loss - is when you sell the stock at price less than you paid for it. You pay tax on the difference between the gain and loss. So the gain will make up for some of the loss.

Dividends - are the portion of the company's profit paid out to it's shareholders. A company's board of directors decides how large the dividend the company will pay, or whether it will pay one at all. Usually only large, mature companies pay dividends, while smaller ones reinvest their profits to continue growth.

The Stock Certificate - The securities called the stock certificate are traditional, and often elaborate, records of stock ownership - but they are increasingly rare.
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