Stocks


A stock is an ownership share in a company. Companies issue stocks to raise money. The primary offering of the stocks is called the primary market and occurs during the initial public offering (IPO). Subsequent sales of those stocks are referred to as the secondary market. A share gives the stockholder a vote in the election of the company's board of directors. Some shareholders receive payments - dividends - periodically when the company realizes a profit. Growth companies use their money to pay for new factories, new employees, and new technologies, rather than pay cash dividents to investors. Growth stocks are expected to have above-average increases in earnings and consequently increase in price.

Preferred stockholders receive cash dividents before common stockholders receive theirs and usually receive a higher cash dividend than do common stockholders. Preferred stock is usually higher in price. If a company is forced to liquidate, preferred shareholders will sometimes receive their investment back before the common shareholders receive theirs. In return for the advantages of preferred stocks, their owners, however, only receive a fixed dividend, while common stockholders receive dividends relative to profits.

Companies sometimes split their stocks to reduce the price so more people will buy the stocks. If you had 10 shares worth $20 each, when the stock is split 2 to 1, you have 20 shares each worth $10.

One of the most widely used indicators of the stock market's movement is the Dow Jones Industrial Average (DJIA), the figure you hear about on your evening TV news. The Dow Jones building is pictured to the right. The DJIA is expressed in points, not dollars, and is determined by adding up the prices of all thirty Dow stocks on any business day and then dividing by a special divisor which is changed when one of the companies splits or increases its stock. The divisors for each of the averages can be found in the fine print below the Dow charts in the Wall Street Journal.


Bonds

Companies also raise money by selling bonds. A bondholder makes a loan of money to a company and the company promises to repay the purchase price of the bond plus an extra amount called interest. A bond's "term-to-maturity" is the length of time that the bondholder must wait to get his or her loaned money back.