Clermont Financial Center
Stocks and the stock marketEvery day, millions of people trade stock in markets around the world. But what does it actually mean to own stock? For many, it simply represents a dream of financial gain. But stocks are much more than investments. They allow companies to expand business overseas, build new buildings, create more jobs, offer better pay and conduct life-saving research. By learning about this complex system, you can begin to understand the importance stocks play in our economy. And you can make more informed decisions about your own investment portfolio. What is stock?Stock signifies ownership in a corporation. Many companies issue stock, also known as equity, to raise money for expansion, equipment upgrades or other costly developments. By purchasing stock, you are actually paying for a small percentage of everything the company owns. Generally, investors purchase stock to realize capital gains. Life of a stockThis simplified version of a stock transaction shows how various people and companies interact with one another.
Across the country another investor, Charlotte, decides to sell her XYZ stock. She contacts her financial advisor that day to place the trade.  You and your financial advisor determine that XYZ stock is an appropriate fit for your portfolio. Your financial advisor then wants to know how to handle the transaction. Will it be a limit order, market order or another type? You decide not to place any restrictions on the transaction and order 100 shares of XYZ at the current market price. Charlotte tells her financial advisor that she wants to sell all 100 shares of her XYZ stock at the current market price. Both orders are transmitted through a secure system to the appropriate market - in this case, the New York Stock Exchange. Two floor brokers receive the orders and take them to the appropriate trading post. At the post, the specialist makes sure that trading of XYZ stock is being executed fairly and in an orderly manner. The floor brokers who represent you and Charlotte agree on a fair price and the specialist executes the trade. Notice is sent to your financial advisor that the trade has been completed. Charlotte’s financial advisor receives the same notice. Both you and Charlotte receive confirmations of the trade from your respective financial advisors. You must now submit payment to your financial advisor within three business days of the notice. Charlotte’s account is credited with the proceeds of the sale within three business days. Types of tradingExchange tradingWhen most people think of the stock market, they imagine Wall Street – home of the New York Stock Exchange (NYSE). But there are several others, such as the American Stock Exchange (AMEX) and smaller regional exchanges. All are centralized locations for trading stocks. Similar to a large auction, these exchanges handle thousands of transactions simultaneously. Brokerage firms purchase memberships or seats on the exchange, allowing their floor brokers to trade stock. Specialists also make their home on the exchange floor, renting space to conduct business. Over-the-counter trading (OTC)The most well-known OTC market, the National Association of Securities Dealers Automated Quotation system (Nasdaq) opened its “electronic doors” in 1971, becoming the first in the world to do so. Later, dozens of markets followed suit including those in London, Tokyo and Paris. OTC markets differ from the exchanges in the way stocks are traded. OTC stocks are traded electronically, without a floor broker or specialist on a trading floor intervening. Market makers, also called independent dealers, compete for investor orders. This creates increased opportunities for a company’s stock to be bought and sold in an orderly fashion. Key players in the stock marketThe following list briefly describes the roles of several key people involved in stock transactions. Financial Advisor - Financial advisors recommend and execute stock investments for their clients. Floor broker - Floor brokers are highly trained agents who buy and sell securities for the general public. They submit orders to the trading post, where specialists match them with buyers or sellers. Brokers generally earn salaries and commissions for their efforts and expertise. Specialists - Specialists are people designated to maintain a fair and orderly market in the stocks assigned to them. They provide information about the total supply and demand for certain issues, while matching buyers with sellers. Types of stockThere are two main types of stock available to the public - common and preferred. Common stockMany investors own common stock, as it is more widely available for purchase. It simply shows that you own a portion of the company. Companies generally offer this type of stock to the public to raise money. The chart below offers some characteristics of common stocks. Preferred stockAfter a company issues all of its common stock, it has the option of issuing preferred stock. Preferred stock also represents ownership of a corporation, but it differs in several aspects. Please review the chart below for some differences.
Types of stock ordersWhen purchasing or selling stock, a financial advisor, along with his or her client, must determine what type of order to place. The type of order informs the floor broker of any restrictions on the trade. For a more complete list, contact your financial advisor. Market orderTracey wants to buy 100 shares of QRS stock right away. She doesn’t care if the price increases or drops, as long as she purchases it. She contacts her financial advisor, who places a market order. This tells the floor broker to execute the trade immediately, regardless of market conditions. Market orders are filled at the best possible price. Day orderDavid wants to sell 5,000 shares of BCD stock by the end of the day. However, if a buyer can’t be located by then, he wants the order terminated. David has his financial advisor place a day order. This tells the floor broker to cancel the order if not executed by the end of the trading day. Limit orderLisa decides to purchase 500 shares of WXY stock. It is currently being traded at $30 a share. She’s willing to purchase it for up at to $32.50 a share. If the price exceeds that, she no longer wants it. She places a limit order. This tells the floor broker to execute the trade if shares are trading at $32.50 or under. The trade will not be executed if the price goes higher than the one specified. Stop orderRick will be going out of town for a couple days, and he’s nervous about one of his holdings. He is afraid of losing all profits made on TUV stock. To protect his earnings, he wants the floor broker to sell the shares if they dip below $22.50 a share. He asks his financial advisor to place a stop order. A stop order signals the floor broker to sell the stock once it hits a specified price. That price is only a trigger, however. If TUV stock drops to $22.45, the order becomes active. It is now a market order and will be sold as such, even if the price goes back up. Raymond James does not offer stop orders on over-the-counter stocks. For more information, please read this article. Common questions about stocksHow do stocks fit into my financial plan?Stocks can play an integral role in your investment plan. They can be a smart investment for anyone looking for long-term gains, although past performance is not a guarantee of future results. Stocks should not be purchased by anyone looking for “fast money.” Depending on your risk tolerance, future goals and current situation, your financial advisor may recommend the purchase of stocks. Why do stock prices fluctuate?If you are familiar with the stock market, you know that prices change throughout the day. But you may not understand how or why the prices fluctuate. Share prices change because of supply and demand. If more investors want to purchase a stock, the price is raised. But if more investors want to sell a stock, then prices fall. Company earnings reports, economic conditions, investor sentiment and other related factors generally fuel supply and demand activity. What is the Dow Jones Industrial Average?The most recognized market indicator, the Dow Jones Industrial Average consists of 30 stocks, each representing a different industry. It provides a convenient benchmark for comparing individual stocks to the course of the market. The Dow was first published in 1896 with 12 stocks. Since that time all but one - General Electric - have been replaced. These stocks are carefully selected by the managing editors of the Dow Jones & Company-owned newspaper, The Wall Street Journal. The Dow is calculated with a special divisor other than the number of stocks, to avoid distortions when constituent companies split their shares or when one stock is substituted for another. While the Dow is arguably the most often quoted, no single index can tell investors everything they need to know about the stock market. Numerous indexes have been developed to track other aspects of the market. Market indexes or benchmarksMost investors are familiar with the Dow and associate it with the general direction of the market. But the Dow alone can’t supply everything you need to know. Therefore, indexes have been developed that track nearly every aspect of the market. Although not comprehensive, this list provides some insight into different benchmarks used today. Dow Jones Industrial Average uses 30 well-known stocks to provide a benchmark for comparing individual stocks with the course of the market. Standard & Poor’s 500 Index covers 500 large-company stocks that account for approximately 80% of the total U.S. stock market value. This calculation gives more weight to stocks that have greater influence on the market. NYSE Composite Index includes all stocks traded on the New York Stock Exchange. The Nasdaq Composite Index tracks performance of stocks traded on the Nasdaq market. The AMEX Market Value Index monitors more than 800 companies listed on the American Stock Exchange. The Wilshire 5000 represents all publicly traded stocks in the United States. The Russell 2000 offers a comparison of the smallest two-thirds of the 3,000 largest U.S. public companies. Quiz: What have you learned? | ||||||||||
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