Read through this post on stocks or skip to the AllGen Academy stocks video below.
When people think of investing, most of them think about the stock market. But what is a stock?
A share of stock represents a fractional ownership of a company. For example, if a company has 100 shares of stock, owning 5 of those shares means you own 5% of the company.
How Stock Ownership Benefits Investors
There are two main components of stock ownership that provide growth to investors:
- Capital Appreciation – the value of the company increases as the company grows and earns more revenue. Your stock also grows as a fractional owner (shareholder) of the company.
- Dividend – a dividend is a sum of money that comes from the company’s profit or surplus paid to shareholders, usually quarterly.
A common metric used to compare stocks is the dividend yield, the number of annual dividends paid to shareholders relative to the current stock price.
Dividend Yield = Annual Dividend Per Share / Current Stock Price
Example: XYZ Stock pays a dividend of $1 per share and the stock price is $50. The Dividend Yield is 2% ($1 / $50 = 2%).
The Total Return of a stock investment includes both capital appreciation and dividends (if any).
Total Return = Capital Appreciation + Dividends
Drivers of Stock Prices
Many variables drive the price of different stocks:
- Profits – how profitable is the company? Profit = Revenues – Expenses
- Sector influences and trends
- Overall stock market trends
Types of Stocks
Stocks are differentiated by various characteristics.
- Size (also called market capitalization)
- Large Cap – company is valued at over $10 billion
- Mid Cap – company valued between $10 billion and $2 billion
- Small Cap – company valued less than $2 billion
- Geographic Region
- US stocks
- International stocks – companies based in developed international countries such as Germany, Japan, England, France, etc.
- Emerging Markets – companies based in developing international countries such as Brazil, Russia, India, China, etc.
- Sector or Industry
- Valuation and Growth Metrics
- Value stocks – companies whose valuation is historically low compared to their revenues, earnings, cash flow, or book value
- Growth stock – companies that are growing revenues and sometimes earnings at a fast rate. They typically have more expensive valuations but are growing fast.
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