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  • Hello I’m Dieter Scherer, fee-only financial planner and founder of RealizeYourRetirement.com.

  • This video is part of a series called Foundational Finance, where well go over the basics you need to

  • know to get up and running in investing and begin to speak the language of finance.

  • Foundational Finance is a part Retirement Planning Academy,

  • a free course I offer on Realize Your Retirement.com.

  • Today’s video covers stocks, what they are, how they provide returns to investors,

  • and how people commonly invest in them.

  • A stock entitles the owner of the stock to a

  • share in the current and future earnings of a company.

  • Which is why a one item of stock is called a share.

  • Owners of stocks are known as shareholders.

  • Stocks are also known as equities.

  • Those of us in finance will interchangeably use the terms,

  • which can be confusing.

  • So just know they mean the exact same thing.

  • Because stocks represent a share in the current and future earnings of a company,

  • their value is determined by the success of the company.

  • They don’t really offer any contractual payments

  • or protections for a return on your investment.

  • Finally, the goal of a public company should be to maximize the investment returns of its shareholders.

  • Unfortunately, it doesn’t always work that way in reality,

  • but in an ideal world, management’s interest should align 100%

  • with the interest of shareholders.

  • Here’s how a shareholder’s returns work.

  • Stocks can yield a return on your investment via two mechanisms,

  • price appreciation

  • or dividends.

  • In this example,

  • the price of our stock increases from $25 to $30.

  • To calculate our return well take the ending

  • price of $30,

  • subtract out the original price of $25,

  • and divide the entire thing by the original price.

  • So, $30 minus $25

  • equals $5.

  • $5 divided by $25 is 20%.

  • So the investor’s return would be 20%.

  • First, let’s cover what a dividend is.

  • Companies generally have two options.

  • Reinvest earnings into the company via things like research and development,

  • marketing, acquiring other companies to expand into new markets.

  • Or if companies see only a small return on investment on

  • internal projects,

  • companies will issue dividends

  • when they can provide more value to shareholders by paying them cash.

  • So a dividend is a cash payment from to company to shareholders.

  • Dividends are completely optional, many companies never issues dividends because they believe

  • they can achieve higher returns by reinvesting

  • their cash.

  • In this example, the price of the stock once again increases from

  • $25 to $30, but this time there is also a $2 dividend.

  • So, $30 minus $25 equal $5.

  • $5 plus $2 equals $7.

  • And finally $7 divided by $25 gives us an investor return of $28%.

  • As you can see the dividend offered a higher return over the price appreciation alone.

  • If you look at the stock market over the last 100 years, youll see that dividends

  • often make up a large portion of the total return an investor receives from a company.

  • So, how do you invest in stocks?

  • Stocks are traded on stock exchanges such as the

  • New York Stock Exchange and the Nasdaq.

  • On exchanges stocks can be purchased for individual companies.

  • Stocks can also be purchased in groups via mutual funds or exchange traded funds., commonly called ETFS.

  • Mutual funds and ETFs will either buy stocks based on certain criteria

  • they have set

  • or they buy stocks based on whether they are in an index.

  • For example, the widely reported S&P 500 Index

  • tracks the largest 500 stocks by total market value in the United States.

  • The Dow Jones Industrial Average tracks the 30 stocks

  • deemed to best represent the major industries in the United States.

  • When people refer to what the US market is doing,

  • they are usually referring to one of these widely followed indexes.

  • Another widely followed index is the MSCI EAFE,

  • which tracks large companies in developed countries in Europe, Asia and the Far East.

  • So an S&P 500 index fund would simply hold the same stocks that are in the S&P 500 Index.

  • Other funds may choose specific criteria when selecting stocks in an effort to either reduce risk

  • and increase returns.

  • In the event of a liquidation bankruptcy,

  • the company’s assets are sold

  • and used to pay the claims of lenders and shareholders.

  • They are usually are paid in this order:

  • The first paid are the debt holders, such as those who have bought bonds.

  • They are paid as much of the balance of the debt they are owed

  • as well as any interest they are owed.

  • Next, if there are any funds leftover,

  • holders of preferred stock are paid their dividends.

  • Finally, common stock holders are paid out whatever remains.

  • When you buy a stock you generally buy a common share of stock.

  • Because common stock shareholders are the last on the list to receive any money in the event of the liquidation of a company,

  • they bear the most risk.

  • However, they also receive the greatest reward if a company does well.

  • Bondholders and preferred stock owners are only paid interest or dividends,

  • but don’t have a share in future profits of the company.

  • Common stock holders are offered the greatest upside potential and the greatest downside potential.

  • If you’d like to learn more about the basics of finance, watch these other videos in the Foundational Finance series.

  • If you want to learn more about investing sign up for my free course Retirement Planning Academy

  • by visiting RealizeYourRetirement.com

  • Inside well discuss how annuities actually work,

  • how value investing and tactical asset allocation can help you reduce risk and increase potential returns,

  • how to maximize your social security,

  • how to make smart retirement planning choices,

  • and get access to exclusive tools and calculators that I’ve built just for members.

  • To sign up for this free course just go to RealizeYourRetirement.com

Hello I’m Dieter Scherer, fee-only financial planner and founder of RealizeYourRetirement.com.

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B2 US stock company finance return dividend price

What Are Stocks?

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    betty13 posted on 2015/04/25
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