by Ric S

Created on: March 20, 2007   Last Updated: April 14, 2007

Many people view the stock market as the territory of financial analysts and number crunchers. Many are aware that investing in stocks can reap great rewards, but are hesitant to do so because of lack of understanding. This often leads a person to hire some financial professional to manage their money and handle their stock investment. This is not necessarily a bad decision, but it is actually not that hard to understand stocks. And having this knowledge will greatly improve the way you manage your own finances.

There are lots of books dealing with stocks if you really want to get more details. And you will be surprised that most of them are easy to read and without really needing mathematical or technical analysis. This article will try to give you the basics on what you really need to know. Once you get the backbone and an understanding of stocks lingo, you will find it very easy to read any other materials about the subject.

* What is stock?

A stock is a proportional ownership of a company. Or, in simplest terms, a stock is a portion of the value of a company. When you buy stock in a company, you are actually purchasing a piece of that company.

Say, for example, adding up all the assets (building, equipment, computers, etc.) of ABC Company adds up to $1,000. If the company issues 1000 shares of stock for people to buy, and you buy one share, they you own 1/1000 part of ABC company.

Being a shareholder of the company entitles you to have a part in company's decision-making. Normally, when a company wants to make decisions like expanding an operation, the company will hold a shareholder's meeting and get a vote. If you have, say 10 shares, then your vote will count as 10 votes. In actual situation, there are thousands (even millions) of people owning shares for one company and not all of them will really attend such shareholder meeting. In such case, the vote is done thru a proxy.

Stocks are split into two issues - common stock that appeals more to individual investors; and the various classes of preferred stock that are geared more to the needs of institutional investors.

Various terms have also arisen to describe the different behaviors of stock including blue chip, secondary, income, growth, and penny stocks. Blue chip refers to stocks of the most established and financially secured companies (like Microsoft, AT&T and IBM).

* How do stocks make money?

When the actual value of the company goes up, the price of a share of stock will rise. This is known as capital

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