What this report is about:
- Understand what a Stock is
- Difference between Common and Preference Stocks
- Where and how to purchase
Back in March 2020, the investing world got into a frenzy during the peak of the COVID-19 pandemic, retail and institution investors hurried to purchase shares on the cheap.
One without any prior knowledge of investing would probably have been fearful and chose to stand on the side-lines.
But these questions remain:
How does one start Investing?
How does one tell if a stock is worth investing?
Most importantly, how does one take the first step?
In this article, we will discuss and help guide a person into the world of investing.
What is a stock?
A stock is a security that represents a partial ownership of a company. This allows the owner of the stock to a proportion of the company’s assets and profits equivalent to the amount of stocks they own.
Generally, listed companies will issue shares to the public on stock exchanges to raise funds for their operations. When someone buys a stock of a particular company, that person is a shareholder of the company. This means that the shareholder is now a partial owner of the issuing company.
Ownership is determined by the numbers of shares a person has in comparison to the total number of outstanding shares. For example, if a person owns 20 shares of the company, and the total outstanding shares of the company is 100 shares, that person owns and have claim to 20% of the company’s assets and earnings.
Shareholders do not actually own the company, rather they own shares issued by the corporations. This means that if a company goes bankrupt, its shareholders’ personal assets are not at risk even if the judge orders to sell all of the company’s assets. Similarly, if a major shareholder goes bankrupt, the person cannot sell the company’s asset to pay off their debt.
Evaluating a stock
There are many metrics that investors use when evaluating a stock. However for most, they will look at the company’s prospectus as it is a legal document where the company provides full details with respect to the investment offerings. A prospectus will have basic information such as:
• Summary of the company’s background and financial information
• The name of the company issuing the stock
Another way to check if a stock is worth investing is to read their annual/quarterly reports, which can be found on the company’s website under Investor Relations section. An annual report will give investors a rough gauge on the company’s financial soundness, management confidence and sources of revenue which are important criteria for evaluating a company.
In addition to the information available, brokerage firms and banks will also share their views of a particular stock via research reports. This will provide a holistic view to the particular stocks which investors are considering.
Common vs preferred stock
Investors of common stocks have voting rights in the company while investors with preferred stocks are not allowed to vote in shareholder meetings. However, preferred stock holders will receive dividends before common stock holders.
Differences between Stocks and Bonds
Bonds are issued by companies to raise capital as well. Bond holders are creditors to the company, and are entitled to interest payment based on their principal value. The interest payment however, is typically fixed unlike dividends. Creditors have priority over stockholders in the event of bankruptcy when a company is forced to sell its assets to repay the debt.
Listing of companies
Companies are required to be listed if they want their shares to be traded publicly through an Initial Public Offering (IPO). The traditional ways of IPOs such as fixed price offering and book building offering are different from IPO through Special Purpose Acquisition Company (SPAC).
Below is a comparison table between a traditional IPO and a SPAC IPO.
How and where do you buy stocks?
Stocks are traded on stock exchanges. After a company goes public, their shares will be allowed to trade on the exchange they are listed in. Investors are required to open a brokerage account in order to purchase stocks on the exchange. For example, a POEMS trading account allows investors to buy stocks across 10 Exchanges at a competitive price.
Delisting of companies
Delisting is the removal of a company from a stock exchange. Companies can voluntarily delist, but are usually delisted because of actions such as ceased operations, bankruptcy or not meet listing requirements.
Companies who fail to meet listing requirements such as maintaining a minimum share price, financial ratios and sales level will be issued warnings. To avoid being delisted, they may undergo a reverse split of their shares.
Exchange Fees and Corporate Actions
When trading with any brokerage firm, investors have to take note of fees involved in trading. Other than the commission fees that most investors are aware of, there are other fees which are often overlooked. Such fees include custody fee, platform fee, maintenance fee, inactivity fee and deposit or withdrawal fees.
Investors are also subjected to corporate actions of the company they invested in. Corporate actions is the term used to describe changes to a company’s structure. As mentioned previously, a reverse split of share to prevent delisting may be utilised. A reverse split is a corporate action. Actions of the company will be further explained and elaborated in our next article on Corporate Actions.
After understanding some of the basics of stock investing, it could be rewarding if the right stocks are being picked. However, before investing, it is important to do due diligence and have an understanding of the underlying risks that come with stock investing when compared to other asset classes such as bonds.
Click here to open a POEMS trading account
Adam Hayes. (2021). How does the stock market work?
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