------------------------------------------------------------
Investing Basics - December 24th, 2004
http://www.investopedia.com
------------------------------------------------------------
------------------------------------------------------------
Table of Contents:
------------------------------------------------------------
1. Term of the Week: Santa Claus Rally
2. Feature Article: Consumer Credit Report: What's On It
3. Q&A: When you buy a stock in a company, does it necessarily
mean that one of the shareholders is selling it to you?
4. Q&A: What is a company worth and who determines their stock price?
5. Test Your Investment Knowledge
------------------------------------------------------------
Sponsor: Free Calls Service: Avg. 193% per trade - 95% winners.
------------------------------------------------------------
Free calls service with 12 month history: Average return 193%
per trade. Max return: 1,215%. Max loss: 4%. Profitable: 19 out
of 20 calls. Includes stocks, commodities, indices and FOREX.
Get "Today's Elliottician Calls" delivered FREE to your inbox today.
Enroll here:
http://www.elliottician.com/inv1104ibs
------------------------------------------------------------
Term of the Week: Santa Claus Rally
------------------------------------------------------------
A jump in the price of stocks that often occurs the week
between Christmas and New Year's. There are numerous
explanations for this phenomenon, including tax considerations,
happiness around Wall Street, and the fact that the pessimists
are usually on vacation this week.
Investopedia Says:
Many consider the Santa Claus rally to be a result of people
buying stocks in anticipation of the rise in stock prices during
the month of January, otherwise known as the January Effect.
For related terms, please go to:
http://www.investopedia.com/terms/s/santaclauseffect.asp
------------------------------------------------------------
Feature Article: Consumer Credit Report: What's On It
------------------------------------------------------------
In 1949 Diner's Club launched the first charge card company.
Fifty-five years later, Americans spend more using credit cards
than they spend in cash, according to a study by Dove Consulting.
With more than $2 trillion worth of credit card transactions
each year, the creditworthiness of the card users is an
increasingly important issue to creditors and consumers alike.
To read the rest of this article, please visit:
http://www.investopedia.com/articles/04/122304.asp
------------------------------------------------------------
Sponsor: Free Calls Service: Avg. 193% per trade - 95% winners.
------------------------------------------------------------
Free calls service with 12 month history: Average return 193%
per trade. Max return: 1,215%. Max loss: 4%. Profitable: 19 out
of 20 calls. Includes stocks, commodities, indices and FOREX.
Get "Today's Elliottician Calls" delivered FREE to your inbox today.
Enroll here:
http://www.elliottician.com/inv1104ibs
-----------------------------------------------------------
When you buy a stock in a company, does it necessarily mean
that one of the shareholders is selling it to you?
-----------------------------------------------------------
There are two main markets where securities are transacted:
primary and secondary. When stocks are first issued and sold
by companies to the public, this is called an initial public
offering (IPO). This initial or primary offering is usually
underwritten by an investment bank that would take possession
of the securities and distribute them to various investors.
This is called the primary market.
Investors participating in the primary market are thus buying
stock directly from the issuing company. However, this market
is usually dominated by sophisticated and experienced investors
(i.e. banks, pension funds, institutional investors, etc).
Therefore, unless an investor is participating in an IPO,
he or she is purchasing securities from another shareholder
on the secondary market.
Therefore, when you buy stock in the secondary market (stock market),
you are purchasing it from another shareholder, who is likely
to believe that the price of the stock will decline.
A shareholder is considered to be any entity that has legal
ownership of a company's shares. Having legal ownership means
being recorded by the company as the owner of the shares: when you
buy a stock from another investor, three days after the
transaction has occurred, your name will appear on the
company's record book and you will be deemed the holder of
record. The investor from whom you purchased the shares will
at the same time be removed from the book of records.
Regardless of whether the investor selling you the stock is
an individual person, financial institution or the company
itself, it is considered to be a shareholder because it
possesses legal ownership of the stock. The seller of a
stock is forfeiting all associated rights to the shares,
such as any dividends, distributions or further capital
gains/losses from the shares they have sold.
To find out more about these terms, please go to:
http://www.investopedia.com/ask/answers/167.asp
For further reading on these two concepts, please see our
"Stocks Basics" tutorial:
http://www.investopedia.com/university/stocks/
And our "IPO Basics" tutorial:
http://www.investopedia.com/university/ipo/
------------------------------------------------------------
What is a company worth and who determines their stock price?
------------------------------------------------------------
A company's worth, its total value, is its market capitalization,
represented by the stock price of a company. Market cap
(as it is commonly referred to) is equal to the stock price
multiplied by the number of shares outstanding (the total
number of a company's shares held by investors).
For example, a stock with a $5 stock price and 10 million shares
outstanding/trading is worth $50 million ($5 x 10 million).
If we take this one step further, we can see that a company
that has a $10 stock price and one million shares outstanding
(market cap = $10 million) is worth less than a company with a
$5 stock price, with 10 million shares outstanding
(market cap = $50 million). Thus, the stock price is a
relative and proportional value of a company's worth and only
represents percentage changes in market cap at any given
point in time.
Any (%) changes in a stock price will result in an equal
(%) change in a company's value. This is the reason why
investors are so concerned with stock prices and any changes
that may occur since a $0.10 drop in a $5 stock can result
in a $100,000 loss for shareholders with one million shares.
The next logical question is: Who sets stock prices and how
are they calculated? In simple terms, the stock price of a
company is calculated when a company goes public, called an
initial public offering. This is when a company will pay an
investment bank a lot of money to use very complex formulas
and valuation techniques to derive a company's value by
determining how many shares will be offered to the public
and at what price. For example, a company whose value is
estimated at $100 million may want to issue 10 million shares
at $10 per share or they may want to issue 20 million
at $5 a share.
To find out more about these terms, please go to:
http://www.investopedia.com/ask/answers/133.asp
For more on stocks and the factors that influence their prices,
please see our tutorial "Intro to Fundamental Analysis":
http://www.investopedia.com/university/fundamentalanalysis/
------------------------------------------------------------
Test Your Investment Knowledge
------------------------------------------------------------
Q. If a public company trading on the NASDAQ has the letter "Q"
after its stock symbol, what does it mean?
A) Class A shares
B) Class B shares
C) It's in bankruptcy proceedings
D) Delinquent in required filings with the SEC
E) It's an ADR (American Depository Receipt)
To answer this question, please visit the homepage:
http://www.investopedia.com/
Happy Holidays!
The Investopedia Staff
http://www.investopedia.com
---
You are currently subscribed to basics as: [email protected]
To unsubscribe or change your email settings go to:
http://www.investopedia.com/email/[EMAIL PROTECTED]
