Basics of Stock Market

Financial markets provide their participants with the most favorable conditions for purchase/sale of financial instruments they have inside. Their major functions are: guaranteeing liquidity, forming assets prices within establishing proposition and demand and decreasing of operational expenses, incurred by the participants of the market.

Financial market comprises variety of instruments, hence its functioning totally depends on instruments held. Usually it can be classified according to the type of financial instruments and according to the terms of instruments' paying-off.

From the point of different types of instruments held the market can be divided into the one of promissory notes and the one of securities (stock market). The first one contains promissory instruments with the right for its owners to get some fixed amount of money in future and is called the market of promissory notes, while the latter binds the issuer to pay a certain amount of money according to the return received after paying-off all the promissory notes and is called stock market. There are also types of securities referring to both categories as, e.g., preference shares and converted bonds. They are also called the instruments with fixed return.

Another classification is due to paying-off terms of instruments. These are: market of assets with high liquidity (money market) and market of capital. The first one refers to the market of short-term promissory notes with assets age up to 12 months. The second one refers to the market of long-term promissory notes with instruments age surpasses 12 months. This classification can be referred to the bond market only as its instruments have fixed expiry date, while the stock market's not.

Now we are turning to the stock market.

As it was mentioned before, ordinary shares' purchasers typically invest their funds into the company-issuer and become its owners. Their weight in the process of making decisions in the company depends on the number of shares he/she possesses. Due to the financial experience of the company, its part in the market and future potential shares can be divided into several groups.

1. Blue Chips

Shares of large companies with a long record of profit growth, annual return over $4 billion, large capitalization and constancy in paying-off dividends are referred to as blue chips.

2. Growth Stocks

Shares of such company grow faster; its managers typically pursue the policy of reinvestment of revenue into further development and modernization of the company. These companies rarely pay dividends and in case they do the dividends are minimal as compared with other companies.

3. Income Stocks

Income stocks are the stocks of companies with high and stable earnings that pay high dividends to the shareholders. The shares of such companies usually use mutual funds in the plans for middle-aged and elderly people.

4. Defensive Stocks

These are the stocks whose prices stay stable when the market declines, do well during recessions and are able to minimize risks. They perform perfect when the market turns sour and are in requisition during economic boom.

These categories are widely spread in mutual funds, thus for better understanding investment process it is useful to keep in mind this division.

Shares can be issued both within the country and abroad. In case a company wants to issue its shares abroad it can use American Depositary Receipts (ADRs). ADRs are usually issued by the American banks and point at shareholders' right to possess the shares of a foreign company under the asset management of a bank. Each ADR signals of one or more shares possession.

When operating with shares, aside of purchase/sale ratio profits, you can also quarterly receive dividends. They depend on: type of share, financial state of the company, shares category etc.

Ordinary shares do not guarantee paying-off dividends. Dividends of a company depend on its profitability and spare cash. Dividends differ from each other as they are to be paid in a different period of time, with the possibility of being higher as well as lower. There are periods when companies do not pay dividends at all, mostly when a company is in a financial distress or in case executives decide to reinvest income into the development of the business. While calculating acceptable share price, dividends are the key factor.

Price of ordinary share is determined by three main factors: annual dividends rate, dividends growth rate and discount rate. The latter is also called a required income rate. The company with the high risks level is expected to have high required income rate. The higher cash flow the higher share prices and versus. This interdependence determines assets value. Below we will touch upon the division of share prices estimating in three possible cases with regard to dividends.

While purchasing shares, aside of risks and dividends analysis, it is absolutely important to examine company carefully as for its profit/loss accounting, balance, cash flows, distribution of profits between its shareholders, managers' and executives' wages etc. Only when you are sure of all the ins and outs of a company, you can easily buy or sell shares. If you are not confident of the information, it is more advisable not to hold shares for a long time (especially before financial accounting published).

Dr. Goldfinger
http://www.financegaes.com

This article can be reprinted for free. To reprint this article, please, include the following code: FinanceGates: free financial advice.

Educational articles, financial news and reviews on investing, personal finance, stocks, funds.

---

The Cub; II

We keep hearing about this bear market and that the... Read More

Dont Ask Your Broker

Unfortunately, most of you who are reading my column are... Read More

Starbucks Stock is Up

Starbucks earnings are up again and so is their stock... Read More

Top 25 Growth Funds

On Monday, November 25, 2000 Investor's Business Daily listed on... Read More

Duck

Duck! No I don't mean a quack, quack. I meant... Read More

Prospering with Mutual Funds: How Anyone can ?Afford? an Investment Advisor

Recently I was invited to appear on a live CNNfn... Read More

Bollinger Bands Strategies

The Bollinger Band theory is designed to depict the volatility... Read More

How To Buy And Hold

One of the most believed bits of conventional wisdom from... Read More

Bad News is Good News

For weeks, no, months we have been bombarded with nothing... Read More

Dont Spend Another Dollar on Business Opportunities Until You Read This

With an insecure job market, overworked employees, insufficient retirement savings... Read More

Evaluation I

An insane person cannot evaluate an insane evaluation system.As you... Read More

Price Targets

Every day in any financial publication you will find the... Read More

Intervention

Intervention. Now don't let that big word scare you. The... Read More

Bottoms Ups

If you have talked to a stock broker or financial... Read More

Selling

The stock market has been going up for more than... Read More

Two for the Money

Look back over the years and try to remember how... Read More

Discipline

One of the great "secrets" of successful people is discipline... Read More

Quality Investment Information: Standing Firm In the Face of Opposition

THERE'S SOMETHING TO BE SAID FOR standing firm in the... Read More

Exchange Traded Funds Primer

Exchange Traded Funds (ETFs) are a group of passive index... Read More

Series 7 Exam

What is the Series 7 Exam? If you... Read More

Lies, Damn Lies and Mutual Fund Returns

How many times has this happened to you? You're at... Read More

Trend Trading - Trading Stocks Using Technical Analysis and Swing Trading Strategies

Peter is a professional trader, Paul is not. Peter has... Read More

Seecrets on Investment: Tired of Making Huge Losses in the Stock Market ? Part 2

Fundamental analysis.Fundamentals analysis says the best way to predict the... Read More

Leverage - Margin Debt

What is leverage?Here is a definition of leverage from an... Read More

Dividends

When is a dividend not a dividend?The latest thing "conservative"... Read More

Prosperity

It has fallen upon the consumer to make our economy... Read More

Direction

It is difficult to make money in a bull market,... Read More

Long Term Investing

In his wonderful book, 'Multiple Streams of Income', best selling... Read More

Boiler Room 7/17/00

On Friday or Saturday evening my wife gets a movie... Read More

Mutual Funds are Dead

You may have wondered why your mutual funds have been... Read More

Swing Trading Strategies

Using Swing Trading Strategies and Technical Analysis when Trading Stocks... Read More

No Load Mutual Funds or Exchange Traded Funds (ETFs)?

If you are fed up with early redemption charges and... Read More

Stock Market Course .... Day Trader Online Seminar ... Can You Generate Profits Trading from Home?

When it comes to stock market trading it PAYS to... Read More