TABLE OF CONTENT

INTRO

In the following pages, in no particular order, I will explain just a few of the many important issues you should take into account before investing your first dollar in a company. There are so many important factors to be considered, I apologize in advance if I haven’t touched on a specific question you may have. If so, let me know and I will try to address them in future books.

 

1 STOCK

 

By definition stock is the capital raised by a business or corporation through the issue and subscription of shares. Stocks are known by and followed by their ticker symbol.

 

For illustration purposes shares in our imaginary widget making company have the ticker symbol  XYZ.

 

Shares in our XYZ, once trading in the open market, can be bought and sold by anyone not precluded from doing so. Stock typically trades on an exchange and there are exchanges all over the world. When trading a stock the buyer offers a bid to buy price, the seller offers an ask to sell price with the difference between the two being the spread. This is commonly referred to as the bid/ask and is the way most investable transactions are quoted. The spread, or the difference between the bid/ask, is the amount the person/exchange brokering the transaction retains.

 

There is a variety of types of stock a company may issue. The most common are:

 

Common stock – These shares represent ownership in a company and any dividend paid on a portion of profits. Dividends tend to vary based on a company’s profitability and decisions on how they choose to use their profits. Dividends are not guaranteed. In addition, one share provides an investors one voting right of the company. An example of a shareholders use of their vote might be to elect board members to oversee management of the company. The size of the company has an impact on the stock. There are several categories that stock fall into depending on their market capitalization which I’ve described below.

 

Large Cap Stocks – Companies with market capitalization of more than 10 billion dollars. You calculate the market cap of a company by calculating the number of shares outstanding by the current stock price. Generally the larger the market capitalization the more stable the stock. The only guarantee in the stock market is  there is no guarantee in the stock market but large cap stocks tend to be the least volatile most stable companies traded on the stock exchanges. Many tend to have more cash on their balance sheets and can afford to ride out economic downturns more easily than companies with market capitalization of less than 10, billion which we talk about below. The larger the company the more arrows it has in it’s quiver when it comes to reducing cost and tightening their belts ie… layoffs, postponement of new products, issuance of bonds with lower interest rates or a reduction in its annual dividend. Smaller companies have a more challenging time with these types of actions and typically suffer from more noticeable stock price swings when forced to take such steps.

 

Midcap Stocks – Short for middle capitalization mid-cap stocks have a market capitalization between 2 and 10 billion. The value of the stock is reached by multiplying the number of the companies shares outstanding by the current trading price. For the middle of the road risk taking investor this is a good way to gain a little exposure to potential higher upside with less potential exposure to sharper downturns or bankruptcies than smaller cap stocks may face. Although they may not have the cash on reserves or the ability to take quite as many steps in the face of an economic downturn they are less risky than their smaller capitalized counterparts.

 

Small Cap stocks – The definition of a small capitalization stock varies between investment firms but is typically in the range of 300 million to 2 billion. Here too the value is reached by multiplying the number of shares outstanding by the current price at which the stock is trading. When you begin to get below the 2 billion range for a stocks market cap the risk begins to increase.  Investing in, or trading, small cap stocks is one of the riskiest way to invest in publicly  traded stocks and should be thought thru carefully. You should consider age, income level time frame and need for income among other things before buying penny stocks. The younger you are and the higher your income typically means the more you can afford to lose a portion of your investment. I would encourage any investor to keep his/her exposure to small cap and more risky investments to a percentage inline with their age and investment goals. An easy example, a 25 year old making 100k yearly could be more comfortable investing 20% of his/her investable funds into risky securities like penny stocks where as a 75 year old on a fixed income probably shouldn’t consider an investment in this type of risk. The lucky (or smart) investor who invests in a solid small cap companies and sticks with them through their development can really benefit. That said, it is far less likely your small cap stock turns you into buy your own island rich.

 

Penny Stocks – A stock valued at less than 1$ and considered very risky. This type of stock comes with serious speculation. I would only invest in a penny stock with money you can afford to lose. Personally I consider this more of  an expensive hobby than investing.

 

Pink sheet stocks – These are over the counter (OTC) stocks that that do not need to meet minimum requirements or file with the Securities Exchange Commission (SEC). The pink sheets got their name because the were actually printed on pink paper. You can also tell if a company trades on these pink sheets because it will end in .PK. These stocks don’t trade on a stock exchange but instead have market makers who provide bid and ask prices. The prices are quoted in a daily publication compiled by the National Quotation Bureau. These are most commonly referred to as OTC stocks. These make penny stocks look like a solid investment. There is little volume in most of these stocks which can make for large gaps between the bid and ask on a percentage basis. Due to the lack of volume it can be difficult to enter into or exit out of an OTC stock with any uniformity. You could see a noticeable move in your favor in an OTC stock but not be able to profit from it because the market maker places such a big gap between the bid and ask. Frankly put these OTC stocks are all too often fraudulent or marked in a way that benefits the market makers at the expense of the investor or are just a gamble.

All that said there is an investor for all stocks and with enough homework, on going due diligence and luck one can make money regardless of the company. After all, all investments go up or down and there is someone of either side… someone will profit.

 

International stock – These are shares of stock that trade on companies based outside of your home country. This is, of course, a revolving definition depending on the country where you currently reside when you trade the stock.

 

Emerging Market Stock – These are stocks that are traded companies in emerging areas such as South Korea or Turkey or India. Stock that is considered emerging market stock represents business in a country that is developing but is potentially being built on a fragile economy or has other risk such as governmental control or  a dictatorship. Other things to consider when considering an Emerging market investment is the country’s population, climate, natural resources and living conditions. This type of stock has a place in your portfolio just as any other but they fall into the more risk for potentially higher return category and don’t let a short run noticeably higher in any of these markets change your stance on only being as risky as you can afford.

 

Preferred stock – This type of stock provides the owner with some form of ownership in the company but generally has no voting rights. Generally the owner receives a dividend (a cash payout per share owned…explained later in the book) with a higher than average yield in lieu of voting rights. An example may be that company XYZ  has a common share that yields a dividend of 2%, they may issue a preferred share with a yield of 6% but no voting rights.
Class – Common and Preferred are the two main forms of stock but a company can issue different classes to accomplish certain objectives. For example, a company may issue a class A and a class B share. They may give the class A share more voting rights than those allotted the Class B shares. This allows a minority group of shares owners to control the majority of the voting rights. These shares are generally denoted with an a or b behind the ticker symbol. ie, XYZa or XYZb.