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When a person thinks of investing, the stock market is likely the first type of investment that comes to mind. In the simplest of terms, a stock is a type of ownership interest in a corporation, and it represents a claim on part of the assets and earnings of that business.

When a person thinks of investing, the stock market is likely the first type of investment that comes to mind. In the simplest of terms, a stock is a type of ownership interest in a corporation, and it represents a claim on part of the assets and earnings of that business.

There are two primary types of stock: common and preferred. Common stocks usually entitle the owners to receive dividends and vote at shareholders’ meetings, while preferred stocks generally have higher priority claims on assets and earnings of the company (including those earnings paid as dividends) than common stock. In the event of a liquidation of the corporation’s assets, preferred stockholders receive payment from the liquidated assets of the corporation before common stockholders.

A share of a company represents ownership.  Thus, “shareholders” or “shareowners” are those who buy shares in a company.  The amount of ownership one holds in a company can be determined by looking at the total number of shares issued by a company versus how many that individual owns. For example, if a company has 1,000 shares of stock outstanding, and one person owns 500 of those shares, that person owns 50% of the company.

Stocks form the foundation of most investment portfolios. They can be relatively low risk and thus have relatively low returns, as shares in municipal utilities tend to be, or they can be more volatile which sometimes translate to higher returns like technology companies or companies that have just issued stock.  Historically, stock investing has outperformed most other types of investing, making them a staple of most portfolios.

Where Stocks Trade

Investors may buy or sell stocks in a variety of ways. The most common is through an investment broker that facilitates the purchase and sale of stocks in a market of publicly traded stocks called a stock market or stock exchange.

There are many stock markets around the world, including several in the United States. One of the most famous exchanges in America, the New York Stock Exchange (NYSE), also happens to be the largest such stock market in the world according to its Composite Index.

The world’s second largest is also an American exchange known as NASDAQ, which stands for National Association of Securities Dealers Automated Quotations. The NYSE Euronext acquired the third largest exchange in America, the American Stock Exchange (AMEX), in 2008 and it became the NYSE Amex Equities in 2009.

Famous stock markets outside of the United States include the London Stock Exchange Group, Japan Stock Exchange Group, and Euronext.

Stock Ratings

A wide array of stock rating systems is available to help investors and financial professionals make educated decisions on how to pick stocks.  Of course, stock ratings are only as reliable as those institutions that developed the ratings. Many different investment firms have developed their own ratings systems, and a few, such as Morningstar, have become internationally recognized.  Nevertheless, stock ratings often boil down to little more than predictions of future behavior based on analysis of past performance mixed with news, insight, and a bit of luck.

Stock ratings can be useful tools for investors, because they can simplify the complicated process of researching a company’s performance and chances for growth down to relatively short summaries—sometimes even one or two word recommendations like “buy” or “hold.” Unfortunately, this same brevity can rob an investor of the use of his or her own insight and leave that person unprepared for possible volatility not conveyed by the analyst’s short breakdown.

A stock rating is just one person’s opinion about a stock’s future based on his or her personal perspective and risk tolerance. That individual’s perspective may be different then another investor’s, thus the stock rating should serve as a suggestion, not a guide for investing. Those considering buying or selling stock should rely upon their own careful combination of research, analysis, and risk tolerance to decide on an appropriate stock investment strategy that is right for them.

Company Rankings

The Fortune 500 is an annual list compiled by Fortune magazine that ranks the top 500 US corporations based on revenue. The list includes publicly traded and closely held corporations and dates back to 1955.  It has made its way into the parlance of most people, whether investors or not. Saying that a company is in the Fortune 500 is short hand for saying it is one of the largest and most successful in the United States.

Another such list is the Forbes Global 2000 (sometimes referred to simply as the “Forbes 2000”). This list ranks the top 2000 companies in the world (not just the US) based on a mix of four values: sales, profits, assets, and market value. First published in 2003, the Forbes 2000 has become useful for determining the relative value of companies around the world, even if they are in different markets.

Stocks Will Remain a Staple of Investment Portfolios

Given the long-term performance of stocks versus any other types of investments, stocks will remain a staple of most investment portfolios.  Although many investors have moved toward managed investment options, like mutual funds, 401(K)’s, and pension plans, individual stocks are contained within those vehicles.

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