Question: What is a Stock?

Posted Friday, July 31st, 2009. Filed Under Financial Empowerment

QUESTION
We wanted to know what financial topics you wanted us to write about. I received an e-mail last week from Kimberly NJ:

I would like to read about stock.  Quite frankly have no idea how to invest in stock. I understand that it is a great way to earn passive income but thats all. I see people looking at the news paper and reviewing details РI always wonder how to get my hands around it.

ūüôā Kimberly

ANSWER
This topic is so vast that we decided to break it up into two areas: What is a Stock and Why Will You Invest In a Stock.

Maritza and I said that we will turn to outside guidance for answers. For this question I turned to Nellie Chowbay, FMA, FCSI
Investment Advisor & Financial Planner with BMO Nesbitt Burns in Toronto, Canada.  I was impressed with one of our discussions and felt that she will be a good person to turn to.  Keep in mind that security laws will differ in each country.  We are only providing the basics.

She has provided quite an in-depth explanation of what is a stock. I encourage you to contact her for further clarification. Her contact info will be listed  below.

Nellie’s Answer:

1. What is a stock and what are the different types?

Stock is a share in the ownership of a company. It represents a claim on the company’s assets and earnings.

Different types of Stocks

Common shares represent ownership in a company and are entitled to a portion of its profits known as dividends. Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid.

Preferred stock represents some degree of ownership in a company but usually doesn’t come with the same voting rights. With preferred shares, investors are usually granted a fixed dividend. In the event of liquidation, preferred shareholders are paid off before the common shareholder.

Income stocks offer a higher dividend in relation to their market price. They are especially attractive to investors who are looking for current income that will gradually grow over the years as a way to offset inflation. If you want dividend income and capital appreciation, you should look towards income stocks.
Example: Bell Canada

Growth stocks are securities which appreciate in value and yield a high return. Their profits are typically re-invested to expand the business. Investors gain because the stock prices increase as the business grows, thus increasing the value of the investment.
Example: RIM, Apple

Value stock is a stock that has gone down in price. It is usually considered to be a good buy. Value stocks are based more on the company’s assets than the earning potential. Investors buy value stocks for shares of a solid company at a good price and that in time the price will reflect the stability of the company.
Example: Cott Corporation

Speculative stocks are like the new stocks on the block. They are the riskiest stocks available. You have to decide based on your risk tolerance level.
Example: small gold and mining companies

Blue chip stocks are stocks of well-established companies that have stable earnings and no extensive liabilities. They have a track record of paying regular dividends, and are valued by investors seeking relative safety and stability.
Example: Bank stocks and the utility stocks

An Analogy
We have been talking about YOUR CLOSET and really ripping it apart to see what you have in it. This is the only way to know where you stand. ¬†Stocks as an investment is like going into one part of your closet for there are other areas: purses, shoes, evening wear, jewlery, etc. ¬†Imagine that you are looking at your casual wear — what you wear out with your girl friends during the daytime. ¬†The idea of stock is that there are different types with varying degrees of risk. ¬†Depending on the type of person you are, you will make your choices: do you want to stick to the classics – jeans and t-shirts: a solid blue chip stock that will not go out of style and will last a long time OR the trendy clothes that are here for the moment and then within a month, six months or even a year you will want to dump? ¬†You will want a bit of both: the split will depend on you. ¬†Speak to your financial planner and decide “what you want to put in your closet” — your “clothes” will need to meet your needs and personality.

Nellie’s Contact Info:
Nellie Chowbay, FMA, FCSI
Investment Advisor & Financial Planner | BMO Nesbitt Burns | 416-359-5365 | www.nelliechowbay.com

Disclaimers
BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Lt√©e provide this commentary to clients for informational purposes only. ¬†The information contained herein is based on sources that we believe to be reliable, but is not guaranteed by us, may be incomplete or may change without notice. ¬†The comments included in this document are general in nature, and professional advice regarding an individual’s particular position should be obtained. ¬†BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Lt√©e are indirect subsidiaries of Bank of Montreal and Member CIPF. “BMO (M-bar Roundel symbol)” is a registered trademark of Bank of Montreal, used under licence. “Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under licence.




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