3. Starting with Stocks.
I am going to divide this chapter the first half and the latter half.
Stocks can be pretty risky investments, but they serve as a great model for learning about individual investments and how to use them because the basic ideas behind stock investment are clear and easy to understand. In addition, the stock contract itself is very simple . Furthermore, the detail of stock investing are very similar to the detail of other types of investing.
When a firm issues stock, it divides the ownership of the company into thousands of equal part, which are individual share. Each share has an equal claim on the firm’s profit and an equal say in the management of the firm. The more shares you buy, the bigger the slice of company’s profits you receive, and the more influence you have on company decisions.
IPO (Initial public offering) : When a company sells its shares to the public for the first time, in a special sale called the initial public offering (IPO), it usually uses investor’s money to expand its business and start new projects.
Additionally, when one company buys another company, it often pays for this purchase by issuing new shares. Otherwise, firms are reluctant to sell shares; there are usually cheaper ways for firms to borrow form investors than selling share of stock. Therefore, most investors buy their stock from other investors not directly from firms.
The term Primary market describes the market buy directly their borrowers who issue them. The term Secondary market describes the market for used.
Dividends are the profits that companies pay out to their shareholders. While it is true that stockholders are entitled to a share of the company’s profits, the company is not under any obligation to actually pay them out. Many corporations do not pay any dividends. When a firms earns profit, it has a choice.
1. It could pay the profit out to the shareholders.
2. It could hold onto the profits and reinvest them into new project.