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Investing Basics - November 12th, 2004
http://www.investopedia.com
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Table of Contents:
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1. Term of the Week: Value Stock
2. Feature Article: Five Investing Pitfalls to Avoid
3. Feature Tutorial: Scams
4. Q&A: What is the difference between preferred stock and
common stock?
5. Q&A: Why don't stocks begin trading at their previous
day's closing price?
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Term of the Week: Value Stock
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A stock that is considered undervalued by a value investor.
Common characteristics of such stocks include a high dividend
yield and low price-to-book ratio.
Investopedia Says:
A value investor believes that the market isn't always efficient
and that it is possible to find companies that trade for
less than they are worth.
For related terms and articles, please go to:
http://www.investopedia.com/terms/v/valuestock.asp
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Feature Article: Five Investing Pitfalls To Avoid
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Big stock market winners look a lot alike - they have strong
earnings and sales growth, a dynamic new product or service,
leading price performance and rising mutual fund ownership.
Interestingly, successful investors share similar traits.
Top investors always keep their losses small; they never
average down in price; they don't immediately shun a stock
because it has a high P/E Ratio; and finally, they pay
attention to the general health of the market when they
buy and sell stocks.
Yet, at the same time, many investors still operate using
unsound principles. Successful investors learn to avoid the
common pitfalls and follow these insights that can put you
well on your way to becoming a better investor.
To read the rest of this article, Please go to:
http://www.investopedia.com/articles/stocks/04/111104.asp
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Feature Tutorial: Scams
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Ever find a scam like this in your email inbox? Although this
fictional example is pretty over-the-top, shams like this do
end up in the inboxes of many investors.
This tutorial will look at numerous types of investment scams,
including email scams like the one above. Being informed about
the different investment scams circulating today is the best
way to avoid being duped and losing your hard-earned money.
To read this tutorial, please go to:
http://www.investopedia.com/university/scams/
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from: www.elliottician.com. This outstanding trading system bases its
market forecasts on thorough statistical analysis of a database
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What is the difference between preferred stock and common stock?
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Preferred and common stocks are different in two key aspects.
First, preferred stockholders have a greater claim to a company's
assets and earnings. This is true during the good times when the
company has excess cash and decides to distribute money (dividends)
to its investors. In these instances when distributions are made,
preferred stockholders must be paid before common stockholders.
However, this claim is most important during times of insolvency
when common stockholders are last in line for the company's assets.
What this means is when the company must liquidate and pay all
creditors and bondholders, common stockholders will not receive
any money until after the preferred shareholders are paid out.
Second, the dividends of preferred stocks are of a different
nature and generally greater than that of common stock. When
you buy a preferred stock, you will have an idea of when to
expect a dividend as they are paid in regular frequencies.
This is not necessarily the case for common stock, as the company's
board of directors will decide whether or not to pay out a dividend.
Because of this characteristic, these stocks typically don't
fluctuate as often as a company's common stock and can sometimes
be classified as a fixed-income security. Adding to this
fixed-income personality is that the dividends are typically
guaranteed, meaning that if the company does miss one, it
will be required to pay it before any future dividends are
paid on any stock.
To sum it up, a good way to think of a preferred stock is
as a security with characteristics somewhere in-between
a bond and a common stock.
To find out more about some of the terms in this Q&A, please visit:
http://www.investopedia.com/ask/answers/182.asp
To learn more about the similarities and differences of
common and preferred shares, as well as many other important
terms and concepts, check out our Stocks Basics tutorial:
http://www.investopedia.com/university/stocks/
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Why don't stocks begin trading at their previous day's closing price?
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Most stock exchanges work under the forces of supply and
demand, which determine the prices at which stocks are
bought and sold. What this means is that no trade can
occur until one participant is willing to sell the stock
at the same price at which another is willing to buy it -
the price at which supply and demand reach an equilibrium.
If there are more buyers than sellers, the stock's price
will increase due to its increased demand. On the other hand,
if there are more people wishing to sell a stock, its price
will decrease.
During a regular trading day, the balance between supply
and demand fluctuates as the attractiveness of the stock's
price increases and decreases. These fluctuations are also
why closing and opening prices are not always identical.
In the hours between the closing bell and the opening bell
of the following day, a considerable amount of things can
affect the attractiveness of a particular stock. For example,
good news such as a positive earnings announcement may be issued,
hence increasing the stock's demand and raising the price from
the previous day's close. On the other hand, the opposite may
happen and bad news might decrease the stock's demand and price.
In any case, it is the changes in demand (and therefore supply)
that occur between the closing and opening bell that result
in the differing opening and closing prices.
To find out more about some of the terms in this Q&A, please visit:
http://www.investopedia.com/ask/answers/139.asp
Have a great week!
The Investopedia Staff
http://www.investopedia.com
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