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Chapter 31
Investing
Section 31.2
Stocks
Read to Learn
Discuss stocks and stock markets.
Identify the advantages and disadvantages of
owning stocks.
The Main Idea
A stock is a share of ownership in a corporation.
Stock prices may change continuously. Though
stocks offer the possibility of high rates of return on
investment, they also carry a greater degree of risk.
Key Concepts
Investing in Stocks
Advantages and Disadvantages of Stocks
Key Terms
stock
a share of ownership in a corporation
dividends a share of profits given to stockholders
Key Terms
capital
gain
a profit made from the sale of a
financial asset such as stock or a bond
capital
loss
an amount lost when an asset is sold
for less than its cost
Key Terms
common stock that provides the most basic
stock
form of corporate ownership
stock that gives the owner the advantage
preferred
of receiving cash dividends before
stock
common stockholders receive any.
Key Terms
a person who buys and sells
stockbroker stocks, bonds, and other securities
for clients
stock
exchange
an organized market for buying and
selling financial securities
Key Terms
mutual
fund
a fund created by an investment firm
that raises money from many
shareholders and invests it in a variety
of stocks or other investments
Investing in Stocks
When a person buys
a stock, there is no
promise of a return on
investment.
stock
a share of ownership in a
corporation
Figure 31.2 Possible Investments
Investing in Stocks
Companies that sell stock must follow rules
set up by the Securities and Exchange
Commission, or SEC.
The SEC also has strict rules for financial
professionals.
Return on Stocks
A shareholder can
receive a return on
stocks through
payment of dividends
and from selling the
stock.
dividends
a share of the profits given
to shareholders
Return on Stocks
The government
taxes the amount
received in dividends
or capital gains.
capital gain
a profit made from the sale
of a financial asset such
as stock or a bond
Return on Stocks
Sometimes, selling a
stock can result in a
capital loss.
capital loss
an amount lost when an
asset is sold for less than
its cost
Return on Stocks
The return on foreign stocks is generally
issued in the currency of the nation where the
firm has its headquarters.
Return on Stocks
The rate of return on stocks is always
expressed as a percentage of the original
investment and figured on an annual basis.
Types of Stock
Common stock
entitles the
stockholder to voting
privileges.
common stock
stock that provides the
most basic form of
corporate ownership
Types of Stock
Preferred stock does
not entitle the
stockholder to vote on
company issues.
preferred stock
stock that gives the owner
the advantage of receiving
cash dividends before
common stockholders
receive any
Types of Stock
Blue-chip stocks are stocks in large, wellestablished companies.
Speculative stocks are stocks in new firms
without an established track record.
Stockbrokers
Stockbrokers act as
a link between
buyers and sellers.
stockbroker
a person who buys and
sells stocks, bonds, and
other securities for clients
Stockbrokers
Stockbrokers charge a commission for their
services.
Many people lower their investment fees by
buying and selling securities on the Internet.
Stock Exchanges
Most stocks are
bought and sold
through a trading
market known as a
stock exchange.
stock exchange
an organized market for
buying and selling
financial securities
Stock Exchanges
Some of the best-known exchanges are the
New York Stock Exchange (NYSE®) and the
American Stock Exchange (Amex®).
Stock Exchanges
Companies are listed on exchanges with
codes called stock symbols, or ticker
symbols.
Over-the-Counter Markets
Over-the-counter securities are traded
directly between buyers and sellers in person
or via computer.
Over-the-Counter Markets
Many over-the-counter securities can be
bought and sold through the National
Association of Securities Dealers Automated
Quotations (NASDAQ®).
Mock Portfolios
Build a mock portfolio by choosing at least three
companies that interest you. Write each
company’s ticker symbol next to its name and
the date. Document their performance. Read
stories about them.
Mutual Funds
A mutual fund has
great buying power.
mutual fund
a fund created by an
investment firm that raises
money from many
shareholders and invests it
in a variety of stocks or
other investments
Short- and Long-Term Investing
Long holding periods are an excellent way to
build wealth while minimizing risk.
Short- and Long-Term Investing
Day traders are people who buy and sell stock
based on minute-by-minute changes in the
price of stocks.
The risk that day traders face is high.
Advantages and Disadvantages of Stocks
A general principle when investing is that the
greater the risk, the greater the possibility of a
larger return.
Advantages and Disadvantages of Stocks
Advantages of Buying Stocks
Over time, stocks offer better returns than savings
accounts or bonds.
Common stockholders can help make decisions
about the company in which they are investing.
The liquidity of stocks allows them to be quickly
converted into cash.
Stocks generally keep up with inflation.
Advantages and Disadvantages of Stocks
Disadvantages of Buying Stocks
More risk than other forms of investing.
No guarantee of return.
If the company goes bankrupt, its stockholders may
receive little or none of their investment back.
A stockholder may lose money when he or she sells
a stock because the value may have decreased.
1. Discuss stocks and stock markets.
Stock is a share of ownership in a business.
Return is the amount of money the stock earns.
Stocks are traded on stock exchanges.
2. Identify an advantage and a disadvantage of
stocks.
Advantage: possibility of receiving a higher rate
of return. Disadvantage: riskier than savings
accounts or bonds.
3. Why is it important to discuss your financial
goals with a financial professional?
so you can reassess your investment strategies
as your needs change
End of
Chapter 31
Investing
Section 31.2
Stocks