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 Stocks are shares in a company. When you invest in a company's stock or buy its
shares, you own part of a company as demonstrated when Lemo
sold half of its ownership or stocks to Tom. If the company makes money, your stock will
increase in value. But, just as in short-term investment and bonds, there are pros and
cons to stock investments.
Advantages
 Stocks have a long historical track record of
outperforming other investments, such as bank deposits, money-market funds, CDs, bonds,
real estate, and commodities. See the chart below for a comparison from 1945 to 1994.
A stockholder or shareholder has voting rights that
bondholders and bank depositors do not have.
Disadvantages
Stock prices often go up and down. They are never
guaranteed.
A shareholder may lose part or all of his money.
Comparison of Annual Rates of Return on
Selected Investments (%)
|
1945 - 1994 |
1984 - 1994 |
1989 - 1994 |
| Inflation |
4.4 |
3.6 |
3.5 |
| S & P 500 |
11.9 |
14.4 |
8.7 |
| U.S. Treasury
Bills |
4.7 |
5.8 |
4.7 |
| U.S. Govt
Bond |
5.0 |
11.9 |
8.3 |
| Corporate
Bond |
5.3 |
11.6 |
8.4 |
| Residential
Housing |
N/A |
4.3 |
2.9 |
| Gold |
6.4 |
0.7 |
0.1 |
| Silver |
4.6 |
-4.2 |
-0.8 |
Source: Ibbotson Associates Annual Yearbook, Ibbotson Associates, 1995.
Stocks : The Highest Performer Over Time
In the long run, stocks have beaten alternative investments such as bank accounts,
bonds, real estate, and commodities. A Chicago consulting firm, Ibbotson Associates, has compiled
data to show that stocks are the way to go. As shown in the chart below, stocks,
represented by the Standard
& Poors 500, doubled the compound annual return of T-bonds issued in
1926.
If you buy a share or shares of stock in a public company, you become a part owner of
that company. As a shareholder of one share of Microsoft,
you enjoy the same basic privileges and rights as Bill Gates who
owns millions of shares.
As a shareholder, you have the privilege to receive quarterly reports and an annual
report informing you of the financial health of the company. These reports are just like
report cards you receive from school. The quarterly reports tell how much money the
company has made or lost and business activities during the reporting period. The annual
report is a combination of all quarterly reports and is often printed with fancy charts
and photographs. It gives detailed business and financial information about the company.
As a shareholder, every year you’ll be invited to attend the annual
shareholders’ meeting, where you can ask Mr. Gates
questions about Microsoft.
In addition, you will have the right to vote for Microsoft’s board of
directors, the shareholders’ representatives who keep track of the important issues
of the company. They will, in turn, hire officers such as Chairman Gates to run the
company.
Most companies use a one-vote-one-share system. Even though your one share of Microsoft
does not count much against Mr. Gates’s millions of votes, the company takes each
vote seriously. If you cannot go to the annual shareholder’s meeting, they will send
you an absentee ballot.
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