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Stocks
Stocks are pieces of paper that say you won a piece of a company.
Stocks are measured in shares. Each share is a small piece of
a company. Each company, depending on its size and the price of
each share, have different number of shares. For example, Exxon
has close to a billion shares in total. So if you own a share of
Exxon, you own one-billionth of the Exxon company.
You can buy the stocks of thousands of companies. Companies that
you can buy the stock of are called publicly-traded. Publicly
traded companies can be divided into three categories: large
companies--established giants such as Exxon, AT&T, IBM, GM, etc,
also known as blue chips, from gambling where blue chips have the
highest value; medium-size companies--fairly large but not as
well-established companies, such as Tyson Foods, Kelly Services(a
nationwide temporary employment agency); small companies--small
and fairly new companies, usually without long track records and
frequently unheard of by the general public.
The three categories are defined by market capitalization, or
market value, of the company. It comes from multiplying the stock
price by the total number of shares of a company. Generally, a
company with market value greater than two billion dollars is
considered a large company, 500 million to two billion dollars as
medium-size company, 500 million dollars and under as small
company.
So why don't people just put all their money into blue chip
company stocks with proven records? Sure large company stocks are
usually safer than small company stocks. But large companies
don't grow as fast, so their stock don't go up in value as fast.
After all, wouldn't you want your money to
grow as fast as possible?
Let's compare a large oil company,
Exxon, and an imaginary small oil company, XYZ. Exxon has about
40 billion barrels of oil reserve(oil still in the ground), worth
about $700 billion. Say XYZ has about 6 million barrels of oil
reserve, worth about $100 million. If both companies found a new
oil field of 6 million barrels of oil reserve, value of Exxon
just increased by 0.015%(6 million/40 billion). For XYZ, the
value of the company doubled(6 million/6 million=100%)!
Generally, it's much easier for a $100 million company to double
its sales and stock price than it is for a $1 billion company.
Historically, small company stocks have outperformed stocks
in general and bonds.
Table of Historical Returns
| Asset | Average return 1926-1985 | Average annual fluctuation(+/-)* | Average return last 20yrs |
|---|
| small company stocks | 12.6% | 31.9% | 15.5% |
|---|
| common stocks | 9.8 | 20.4 | 11.3 |
|---|
| long-term corporate bonds | 4.8 | 6.9 | 9.5 |
|---|
| long-term government bonds | 4.1 | 7.3 | 9.1 |
|---|
| U.S. treasury bills | 3.4 | 0.9 | 7.7 |
|---|
| inflation | 3.1 | 2.1 |
|---|
*two-thirds of the returns varied from the average
by plus or minus the percentage shown.
Source: Ibbotson Associates
But as you can see, higher returns also come with higher risks.
On an average year, small company stocks could return a whopping
44.5%(12.6+31.9) or drop by 19.3%(12.6-31.9).
The advantage held by young people is that we have a lot of time
to achieve what is probably the most important goal, provide for
a comfortable retirement. Since time is on our side, it pays to
hold on to risky investments like small company stocks. Over
time, you have a greater likelihood of achieving a commensurate
reward and less risk for losing money. The worst annualized rate
of return from small company stocks over any 20 year period was
5.7%(1929-48). That beats all other investments.
Usually stocks are bought through stockbrokers who charge you a
commission for each transaction. That can really eat into your
bottom line if you only have a small amount to invest and want to
buy several stocks. Most have minimum commission of $30 and up.
The easiest way to buy stocks if you have a limited budget is
probably through dividend reinvestment plans(DRIPs), which
automatically buys more stocks with any dividends(part of the
company's profit that's paid out directly to the shareholders)
you receive. Most also allow you to buy more stocks for a very
low or even no fee. Most DRIPs require you to already have at
least one share of the stock, but a few, such as Exxon's
DRIP(800-252-1800), allow you to buy even your first share
through the program. For more information about DRIPs, read the
book No-Load Stocks by Charles Carlson.
Online Resources
Quotes
Yahoo Quotes-One of the best stock, mutual fund
quote servers on the web. Provides free 20 minute delayed stock quotes, news
stories from several major newswire services,
such as Reuters Securities News, PR Newwire,
all in one easy to read format.
Simulations
Sierra Stock Market Contest-A stock market
simulation game. Register to join the several ongoing games to win Sierra games.
Buy and sell real stocks at real prices.
News
Bloomberg Information Services-A leading provider
of financial information.
San Francisco Chronicle Business Section-A high informative
business section, with lots of articles on high-tech related companies. Herb Greenberg's column is especially good and insightful.
Wall Stree Journal Interactive Edition-Register to read the online edition of the most
respected financial publication. Updated several times daily.
Magazines
Individual Investor Magazine-An excellent magazine. Each
issue features several stock picks and articles on mutual funds. Each year they pick 25 stocks-
Magic 25-and track them throughout the year. Their stock picks have
performed extremely well.
Barron's Magazine-A highly regarded weekly magazine filled
with articles on the stock market, mutual funds and the economy.
Forbes-Great monthly magazine filled with articles
on stock market, mutual funds and the economy.
Business Week-Weekly magazine on general business and investing.