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Investing Basics - September 10th, 2004
http://www.investopedia.com
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Table of Contents:
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1. Term of the Week: Golden Boot
2. Special Feature: A Tutorial for Beginner Investors
3. Q&A: What exactly is a company's float?
4. Q&A: How does an investor make money on bonds?
5. Test Your Financial Knowledge
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Term of the Week: Golden Boot
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An incentive encouraging employees near or at the age of
retirement to retire voluntarily.
Investopedia Says:
A golden boot is usually offered by companies planning on
downsizing or hiring new employees. The goal for these companies
is to avoid potential lawsuits stemming from labor laws that
protect employees from age discrimination.
For related terms and articles, go to:
http://www.investopedia.com/terms/g/goldenboot.asp
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Special Feature: Investing 101: A Tutorial for Beginner Investors
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Have you ever wondered how the rich got their wealth and then
kept it growing? Do you dream of retiring early (or of being
able to retire at all)? Do you know that you should invest, but
don't know where to start?
If you answered "yes" to any of the above questions, you've come
to the right place. In this tutorial we will cover the practice
of investing from the ground up. The world of finance can be extremely
intimidating, but we firmly believe that the stock market and greater
financial world won't seem so complicated once you learn some of
the lingo and major concepts.
Read this feature at:
http://www.investopedia.com/university/beginner/
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Sponsor: FREE Options Investing Starter Kit
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Are you interested in investing in exciting and high potential
investments?
Receive a FREE investing package and your choice of a CD-ROM,
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http://click.investopedia.com/?RC=11028&AI=559
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What exactly is a company's float?
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The term "float" refers to the regular shares that a company
has issued to the public that are available for investors to
transact. This figure is derived by taking a company's
outstanding shares and subtracting from it any restricted stock.
(Restricted stock is stock that is under some sort of sales
restriction, for example, stock that is held by insiders and
cannot be traded because they are in a lock-up period following
an IPO.)
A company's float is an important number for investors because
it indicates how many shares are actually available to be bought
and sold by the general investing public. The company is not
responsible for how shares within the float are traded by the
public--this is a function of the secondary market. Therefore,
shares that are purchased, sold, or even shorted by investors
do not affect the float because these actions do not represent
a change in the number of shares available for trade: they simply
represent a redistribution of shares. Similarly, the creation
and trading of options on a stock do not affect the float.
Still don't quite understand what a float is? Here's an example:
Say the TSJ Sports Conglomerate has 10,000,000 shares in total,
but 3,000,000 shares are held by insiders who acquired these
shares through some type of share distribution plan. Because
the employees of TSJ are not allowed to trade these stocks for
a certain period of time, they are considered to be restricted.
Therefore, the company's float would be 7,000,000
(10,000,000 - 3,000,000 = 7,000,000). In other words, only 7,000,000
shares are available for trade by Joe and Jane America (or
Canada, or China, or England, and so on).
It should also be noted that there is an inverse correlation
between the size of a company's float and the volatility of the
stock's price. This makes sense when you think about it: the
greater the number of shares available for trade, the less volatility
the stock will display because the harder it is for a smaller
number of shares to move the price.
To learn more about this subject, check out the article "The
Basics of Outstanding Shares and the Float":
http://www.investopedia.com/articles/basics/03/030703.asp
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How does an investor make money on bonds?
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Bonds are part of the family of investments known as fixed-
income securities. These securities are debt obligations,
meaning one party is borrowing money from another party who
expects to be paid back the principal (the initial amount
borrowed) plus interest.
Investors (the holders of the bond) can make money on bonds
in two ways.
First, as we already mentioned, the holder receives interest
payments--known as the coupon--throughout the life of a bond.
For instance, if you bought a 10-year bond with a coupon rate
of 8%, the issuer would send you a coupon (interest) payment
of $80 every year. (Most bonds pay twice a year so, technically,
you would receive two checks for $40 each.)
Second, bonds fluctuate in price just like any security. This
price fluctuation depends on a number of factors, the most
important of which is the interest rate in the market. Some
investors attempt to make money from the changing price of a
bond by guessing where interest rates will go.
If you'd like to learn more about bonds, see the bond basics
tutorial:
http://www.investopedia.com/university/bonds/
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Test Your Financial Knowledge
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Q. Which technical analysis tool indicates overbought and
oversold conditions using the simple moving average and standard
deviation?
a) Relative Strength Index (RSI)
b) Exponential Moving Average (EMA)
c) Bollinger Bands
d) Money Flow Index (MFI)
e) The Volatility Index (VIX)
To answer this question, please visit the homepage:
http://www.investopedia.com/
Have a great week!
The Investopedia Staff
http://www.investopedia.com
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