Stock Basics
From Bogleheads
| Sources needed. Please help improve this article by referencing sources. Please improve this article if you can, or talk about solutions on the discussion page. |
| Please help improve this article by expanding it. Please improve this article if you can, or talk about solutions on the discussion page. |
Bogleheads Investing Start-Up Kit: Asset Classes
- Money Markets
- Bond Basics
- Treasury Inflation Protected Securities
- Stock Basics
- Domestic/International
For Introduction to Investing and Implementing an Investment Plan see Bogleheads Investing Start-Up Kit.
A stock share (also known as an equity share) represents ownership in a corporation.
The two familiar types of stock shares are "common stock" and "preferred stock." Owners of common stock typically have voting rights to elect board members of the corporation. In some cases, such as Ford Motors, there are two (or more) types of common stock. One class has the right to vote and the other does not. The Ford family created this dual-share class in such a way that they were able to maintain control of the company without being fully exposed to its risk as an actual majority shareholder. Preferred stock typically has no voting rights but is legally entitled to dividends before other shareholders. Holding common stock in a corporation allows a shareholder the right to receive dividends from the company, and gives the shareholder a right to the company's assets during bankruptcy liquidation, though not before all creditors have been paid first. Holding stock may result in capital appreciation, as the demand for the stock goes up as the company grows its profits.
Contents |
Buying and Selling
Purchasing individual stock may be done through either direct investment with the company (through a dividend reinvestment plan, for example), or through a brokerage account. Buying and selling through a brokerage account usually involves a commission paid to the broker. Many discount brokerages offer commissions under $20, and some even offer free commissions for certain situations. Full service brokerages can charge anywhere from $50 to $200 a trade depending on their rates, the number of shares purchased, and how often the stock is traded.
Classification of Common Stocks
Country
One classification of stocks is the country where the corporation is headquartered. Noting where a stock trades is important because international investments can provide a diversification benefit to a portfolio invested solely in the domestic market. All else being equal, a domestic investor should realize a diversification benefit from investing internationally because the equity markets in other economies are less-than-perfectly correlated with the domestic equity market. However, investments in foreign markets are also exposed to fluctuations in foreign exchange rates. In the long term, currency movements should have no impact on the returns of a foreign portfolio, but in the short term these fluctuations can significantly impact both portfolio volatility and returns.
Stocks are traded on stock exchanges all over the world, and generally speaking, buying stock on an exchange in a different country from your own will likely result in higher costs to buy and sell. This expense is greater if the company is located in a smaller or more underdeveloped country where the stock may not get traded frequently, resulting in even higher transaction costs. In the U.S., an American Depository Receipt (more commonly known as ADR) is a type of stock traded on U.S. exchanges that represents ownership of a non U.S. corporation. ADRs allow U.S. investors the ability to more easily and cheaply buy stock in corporations from many countries.
A representative global index such as the S&P/Citibank Global Broad Market Index illustrates the breakdown of the global equity market by country.
Sector
Stocks may also be classified by the sector of business or industry where the corporation makes its revenue and profits. MSCI and S&P have created the widely used GICS global system of business sectors, which divides companies into four levels: 10 sectors, 24 industry groups, 64 industries, and 139 sub-industries. The ten sectors are listed below:
| Global Industry Classification Standard |
| Consumer Discretionary |
| Consumer Staples |
| Energy |
| Financials |
| Health Care |
| Industrials |
| Information Technology |
| Materials |
| Telecommunication Services |
| Utilities |
A detailed description of the GICS sectors is available at Sector Descriptions.
Size
Stocks may classified by the size of the corporation. This is most commonly done looking at the market capitalization. Market capitalization is simply a measurement found by taking a stock's current share price and multiplying it by the number of stock shares outstanding.
Exact market cap ranges will vary among different financial and rating institutions, but there are three different terms commonly used to describe stocks by their general size.
- Large Capitalization Stocks:
Large cap stocks have a market cap over $10 billion dollars.
- Mid Capitalization Stocks:
Mid cap stocks have a market cap between $2 billion and $10 billion dollars.
- Small Capitalization Stocks:
Small cap stocks have a market cap between $300 million and $2 billion dollars.
While these are the most common market cap references, there are also some less commonly used: Mega Cap, Micro cap, and Nano cap. Market cap terms are relative and are constantly changing as companies get bigger and smaller.
Style
Stocks may also be classified by "style," either Growth, Value, or Blend. Growth stocks are companies that are growing their profits at a very fast rate and are expected to continue to grow at an increasing rate. Value stocks are stocks that tend to trade at deep discount relative to their intrinsic value (as defined by profits, book value etc.). Common investor perceptions tend to perceive growth stocks as "high flying companies" and value stocks as "distressed companies."
Risks
Stocks are subject to financial risk, business risk, and market risk. Stock funds are subject to market risk. International stocks are subject to currency risk and political risk. See Risk.
Role in a portfolio
How to Cite
You can link to this page from the Bogleheads Forum by copying and pasting the following text into your forum posting:
Please see [url=http://www.bogleheads.org/wiki/Stock_Basics]Stock Basics[/url] on the [url=http://www.bogleheads.org/wiki/Main_Page]Bogleheads Wiki[/url].
| Notice something that needs correcting? Notify a wiki editor or become a wiki editor and fix it yourself! |
|---|
| US Stocks | ||
|---|---|---|
| Stock Topics | Stock Basics • Preferred stock • Approximating Total Stock Market • Domestic Small Cap Value | |
| Research Resources | Vanguard SEC Filings: U.S. Stock Index Funds | |
