Essay on Stocks Are Financial Instruments

Essay on Stocks Are Financial Instruments

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AFIN 252 Applied Financial Analysis And Management

Stocks are mainly classified into common and preferred. Common stocks typically offer you the right to vote and receive dividends. Preferred stocks do not offer voting rights, but offer you higher claim on assets and earnings than common stocks and pay regular dividends. Moreover, as a shareholder of preferred stocks you have priority in case the company goes bankrupt or is liquidated.

Stocks are also classified into other types including:

Growth stocks are usually issued by fairly low-cost corporations whose value can increase in the long-term and have a fair growth potential.

Income stocks, which have a low growth potential but consistently pay high dividends.

International stocks, which are defined by their geographical allocation and by issued by foreign companies, but be traded on U.S. exchanges.

Cyclical stocks, which are related to the variations of the economic environment.

How to evaluate stocks

The beta coefficient (b) measures a stock’s volatility relative to the market’s risk. The market has a beta equal to 1.0. Stocks with a beta greater than 1.0 are considered more volatile and high risk because their prices fluctuate sharply. On the contrary, stocks with a beta lower than 1.0 are considered less volatile and low risk because their prices fluctuate less than the market average. Stocks with a beta equal to 1.0 are considered as volatile as the market.

This Other factors that should be taken into account when evaluating a stock’s performance are:

Stock price: the price that the stock is trading.

Market capitalisation: the total market value of the company based on its shares outstanding.

Trading volume: the amount of share transactions. The higher the trading volume, the higher the liquidity of the stock.

52-Week Range: the 52-week range of a stock shows a stock’s highs and lows over the past 12 months, including year-to-date change, thus providing an idea of a stock’s overall performance.

Price to earnings (P/E) ratio: P/E measures a stock’s current price relative to per share earnings and it is used to compare a company to similar companies.

Dividend yield: dividend yield measures how much money investors get for each dollar invested in the company.

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How to invest in stocks

To properly invest in stocks you first need to understand how they function. Companies are evaluated based on their market capitalisation, which is the value of shares outstanding. This means that when a company is profitable, the value of its shares outstanding increases and therefore, the claim of the shareholders on assets and earnings increases as well. Yet, it is of high importance to set investment goals, which means to undertake the investment risk that suits your investor profile. Are you a risk-taker investor? You should invest in aggressive stocks. Are you risk-adverse? You should build a conservative portfolio that produces average returns in the long-term.

Why You Should Trade Stocks Online

Part of a comprehensive investment strategy is to understand the latest trends and use them to make the most of your trading experience. Here are some reasons why you should use online stock trading as a part of your investment strategy:

1. Lower commissions – Online stock trading has lower commissions than traditional trading through a broker. Typically, online platforms charge between $6.95 and $19.95 commission per trade. However, there are online platforms that charge $25 or even $30 commission per trade, but if you buy and sell in large volumes you may be able to lower the commission and trade at $0.01 of the transaction value. Besides, the more people are attracted to online stock trading, commissions are brought down.

2. Real time quotes – By trading online, you can have efficient and quick access to real time information 24/7, all year round. You don’t have to wait for your broker to be available when you need to discuss your treading activity and assess your financial situation. You are free to decide what stocks you want to buy or sell and when and you can do any trade right away. You can also have access to free stock quotes and research the performance of stocks that match your investment profile. Online stock trading allows staying competitive by maximizing the benefits of real time quotes.

3. Access to research tools – Online stock trading allows you to have unlimited access to research tools mostly because you can trade 24/7, 365 days a year. You can test new stock exchange listings and stock performances by using various research tools that are typically available from financial websites for free. In that way, you can capitalize on stock trading.

4. No intermediaries – When you trade stocks online yourself, you are responsible for your trades and you can save time and money by avoiding the intermediaries. You can have access to your account 24/7 and decide on you trading activity by assessing the global markets. By eliminating the intermediaries, you capitalize on investment opportunities that are instantly available and which you would perhaps miss out if you needed to wait for your broker till the next morning.

5. Better control – By trading stocks online you have the absolute control over your portfolio and you can execute your trades when and as you wish. You are not obliged to take your broker’s approval, neither waiting for his or her input to complete a trade. You are in charge of your own trades and responsible for your investment decision making.

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