Investing in stocks in USA

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Overview

Once you have decided on investing, there are various options available. Chief among them:

Short-Term Savings

Long-Term Savings

Retirement Plans

  • Individual retirement account (IRA)
  • 401(K)
  • 401(B)
  • Keogh
  • SEP Plan

Investing in Stocks

Historically, stocks had much better returns than bonds and other investments. Essentially, stock lets you own a part of a business, the modern stock market exists as a way for entrepreneurs to finance businesses using money collected from investors. In return for giving up the money to finance the company, the investor becomes a part-owner of the company. That ownership is represented by stock that are "secured" by a claim on the assets and profits of a company.

One can invest in either Common Stock or Different classes of stock.

Common Stock

Common stock is the most common form of stock an investor will encounter. This is an ideal investment vehicle for individuals, because anyone can take part; there are absolutely no restrictions on who can purchase common stock.

Common stock is more than just a piece of paper; it represents a proportional share of ownership in a company. Shareholders "own" a part of the assets of the company and part of the stream of cash those assets generate. As the company acquires more assets and the stream of cash it generates gets larger, the value of the business increases. This increase in the value of the business is what drives up the value of the stock in that business.

Because they own a part of the business, shareholders get a vote to elect the board of directors. The board is a group of individuals who oversee major decisions the company makes. They tend to wield a lot of power in corporate America. Boards decide whether a company will invest in itself, buy other companies, pay a dividend, or repurchase stock. Top company management will give some advice, but the board makes the final decision. The board even has the power to hire and fire those managers.

Shareholders also get a full share of the risk inherent in operating the business. If things go bad, their shares of stock may decrease in value. They could even end up being worthless if the company goes bankrupt.

Different classes of stock

Occasionally, companies find it necessary to concentrate the voting power of a company into a specific class of stock, in which a certain set of people own the majority of shares. For instance, if a family business needs to raise money by selling equity, sometimes they will create a second class of stock that they control and has, say, 10 votes per share of stock, while they sell another class of stock that only has one vote per share to others.

When there is more than one class of stock, they are often designated as Class A or Class B shares.
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