What are stocks?

Stocks are securities that give stockholders an ownership stake in a business.

Most companies sell their shares to raise additional funds to expand their businesses. This is called an initial public offering (IPO), and stockholders can resell their shares on the stock exchange after the IPO.

The expectations for the company’s profits or earnings are usually what drive stock prices up or down.

Stock Types

Common stock and preferred stocks are the two main types of stock.

• Common StocksCommon stocks entitle owners to vote in shareholder meetings and receive dividends.
• Preferred Stocks
• The preferred stockholders don’t usually have voting rights, but they do receive dividends before the common stockholders. They also have priority if a company is liquidated and goes bankrupt.
• Growth Stocks
• Earnings of growth stocks grow faster than the average market. Investors buy these stocks in hopes of capital appreciation. They do not pay dividends. A new technology company will likely be a growth stock.
• Income Stocks
• Dividends are paid consistently by income stocks. Dividends represent a portion paid by a company to its shareholders. Investors purchase them because of the income that they produce. A well-established utility company will likely be a good income stock.
• Value Stocks
• A value stock has a low Price-to-Earnings ratio (PE), which means they’re cheaper to purchase than stocks with higher PE. Value stocks can be income or growth stocks. Their low PE ratio could reflect that they’ve fallen out of favour with investors. Value stocks are bought by people who hope the market will recover.
• Blue-Chip Stocks
• Shares of large, well-known corporations with a strong growth history are blue-chip stocks. They usually pay dividends.

Benefits of Stock Investing

Investing in stocks can provide a number of benefits.

• Capital gains that can be made by owning an investment that increases in value over time
• Dividends received by the company could generate income.
• Long-term capital gains are taxed at lower rates.

Stocks: Potential Risks

The following are some of the risks associated with investing in stocks:

• The share price of a company can fall to zero.
• You may not receive your money back if the company fails.
• Dividends and share prices may fluctuate.

How to Buy Stocks

Here are some of the most popular ways to purchase stocks:

• Direct Stock Plan Through Companies
• Some companies will allow you to purchase or sell stock without the use of a broker. Some companies restrict direct stock plans only to existing shareholders or employees. Some companies require minimum purchases or account levels.
• Dividend Reinvestment Plans
• Dividend payments can be reinvested into the company to increase your shareholdings. This can only be done if you sign an agreement. You can check with your broker or the company to find out if there will be a charge for this service.
• Full-Service Broker or Discount Broker
• Brokers charge a commission to buy and sell stocks for their customers. Many brokers have websites where customers can buy stocks.
• Stock Funds
• Stock funds offer another option to purchase stocks. Stock funds are a mutual fund type that invests in stocks. Stock funds can be bought directly from investment companies or via a broker.

Researching Stocks

It’s important to do some research on the company before investing.

You should also consider:

• Annual Reports
• The annual report of a company is one of the best sources of information. You can learn about a company by reading its annual report. It will tell you how it is doing, whether there are any losses or profits, and what the company’s future strategy is.
• Prospectus
• The Securities and Exchange Commission requires that companies issuing shares file a prospectus, an official legal document that provides details about an investment.
• Stock Reports
• Many reports can be obtained about the performance of a particular stock. Ask your stock broker or investment adviser for more information.

Working with Licensed Professionals & Registered Products

Washington Department of Financial Institutions requires that investment professionals be licensed. Most investment products must also be registered at DFI. Contact the Washington State Department of Financial Institutions to check on the status of a license and to see if any complaints have been filed against an investment professional.

Contact your state securities regulator if you do not live in Washington.

The question you should ask the professional who is selling the investment about:

1. Are the investments registered?
2. Investors have complained about their investments in the past.
3. Has the person who owns or manages the investment had trouble in the past before?
4. Does the person selling my investment have a license in my state?
5. Does the person selling your investment have any history of trouble with the government?