(Prosperity)
Define: Stocks -Taking Stock
That the New York Stock Exchange wound up on the remains of an old Dutch wall in Lower Manhattan isn’t a fluke. Economic historians believe that the first company in history to issue shares of stock was the Dutch East India Company in 1606. The Dutch East India Co, a Dutch government entity, raised capital by selling pieces of its ownership to finance shipbuilding, which led to the Netherlands becoming a naval superpower and colonial giant – for a while at least.(Coming soon, the truth about “bubbles.”)
Since the end of the 17th century, the, business of stock trading has been booming in lower Manhattan. For the last 400 years or so, companies have been issuing shares of ownership to raise money, in a process called equity finance, and shares already issued have been traded among investors. (On Tuesday, April 1, the New York Stock Exchange saw 4,808,395,000 shares of stock traded in its daily volume.) The other way, debt financing, involves issuing bonds or borrowing money from a bank. An important difference between equity ( stocks) and debt ( notes and bonds) is the level of risk – when you buy a stock, there is no assurance that your investment will retain the same value. This is where the “no guts, no glory” theory comes into play. While the risk is greater with stocks, the possible reward is also greater. According to Forbes.com, over the long term, investments in stock have had greater returns than any other security.
“Stock” refers to a security representing ownership in a company and a right to the assets and revenues of that company. Simply owning stock – being a shareholder - won’t get you a corner office or all the perks of the board of directors, but it does give you the right to share in any dividend, which is a payment on earnings made by the company to shareholders. Dividends usually come as either cash or as additional stock in the company or a subsidiary.
As a partial owner of a company, a stockholder shares in the asset value and revenue of that company. Originally, stock ownership would get you an actual paper stock certificate, but now everything is recorded electronically at brokerage houses and other clearing agencies (Stock held at brokerages are referred to as being held in street name).
In addition to dividends, stock holder wealth can result from growth. By purchasing shares of a company, you are risking the cost you paid on the possibility that the market value of a company will grow, and the value of your shares will increase in direct proportion. As a company grows and establishes its brand and services, its value increases. As its value increases, more people want to own a piece of that pie and it drives the price per share of the company up. Choosing the right company is obviously key.
Many variables affect stock value – the products or services offered by the company, the quality and integrity of its management and its financial performance, especially compared to its projected earnings. Today all publicly traded companies are required to supply periodic information, and stock market prices are likely to be affected by periodic profit projections and reports. General economic and industry conditions can also affect company performance and share prices. If people are facing more financial crunches, such as disruptions caused by the sub-prime mortgage crisis and increasing layoffs, they’re less likely to have money to spend on goods or services or to invest. This lack of spending affects the performance and shareholder value of an individual company. In addition, stock market prices may be adversely affected by the lack of dollars available to invest in the marketplace.
Stocks have traditionally been a main sourced of increasing your worth. The key to stock investment is information. Federal laws require that publically traded companies provide a wide variety of fairly current information. You can learn about earnings and dividend history; you can get information on products and services offered by each company, you can get information about the experience and expertise of management – everything but green eggs and ham is available. The secret to successfully investing in stock will always be informed good judgment. Assess the level of risk appropriate for your situation, get advice you can trust, and above all, keep informed. (For people like us with day jobs, remember, there are trained professionals out there who will help you grow your portfolio – for a small fee of course.)
From issuing the first public offering, to setting the tradition of trading on Wall St, the Dutch prove that the secret to successful stock trading is recognizing value. Research and using your best judgement, rather than listening to a crowd or a huckster, can leave you with an island in the middle of the Hudson River for only beads, rather than a bridge in Brooklyn.