Companies that need to raise capital to finance their operations can issue stock. The first time a company issues stock to the public is called an initial public offering (IPO). Once a company issues an IPO, the stock can be traded on a stock market exchange. When an investor purchases a share of stock, the investor is buying an ownership interest in the company. Companies trade tens of millions of shares of stock each day on stock exchanges around the world. The two most commonly-used domestic exchanges are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).
Types of Stocks
Companies may have different objectives when issuing stock. These objectives include whether a company wants to separate the shareholders’ financial interest in the company from the governance of the day-to-day operations, and whether the company issuing the stock wishes to have the stock traded on an exchange. Companies may issue common stock and preferred stock.
- Common Stock
Common stock is the type of stock issued most often by publicly-traded companies. Two reasons for investing in common stock are asset appreciation and dividends. Asset appreciation occurs when the value of a particular stock is greater than the amount an investor paid for the stock. Asset depreciation, which can also occur, occurs when the sales price of a stock is lower than the investor’s purchase price. Dividends are paid to shareholders from a company’s retained or current earnings. Common stock dividends are generally paid on a quarterly basis. Dividends are not guaranteed. When an investor purchases common stock shares in a company, the investor receives certain rights. For example, investors are able to vote in elections to pick a company’s leadership and on issues that are important to a company’s profitability and fiscal integrity.
- Preferred Stock
Dividends and safety are primary reasons for purchasing shares of preferred stock. Preferred stock does not offer investors the same level of capital appreciation as common stock does, but it also is not as volatile as common stock. Preferred stock shareholders may receive a consistent dividend payment. If a dividend is paid, the preferred stock dividend is paid first. In bankruptcy proceedings, preferred stock shareholders are paid before common stock shareholders.
Stock Brokers
Investors purchase stock through a broker. There are two common types of brokers: full-service brokers and discount brokers.
- Full-Service Brokers
Full-service brokers offer a wide variety of services and products. Many full-service brokers offer websites where clients can manage their accounts online, and also have branch offices so investors can meet locally with a financial advisor. Full-service brokers also usually offer financial planning services and give advice on selecting certain investments based on an investor’s goals and risk tolerance. Because of these services, full-service brokers are usually more expensive then discount brokers.
- Discount Brokers
Discount brokers generally are the least expensive way for investors to purchase stocks. Many discount brokers do not operate out of offices, and instead offer services online or by phone. Usually, when using a discount broker, investors will not receive financial planning services or investment selection advice. Investors that use discount brokers typically know what they want to invest in and are looking for the most cost-effective way to purchase those investments.
Diversification
Diversification can help reduce risk and smooth large swings in a portfolio’s rate of return. Diversification applies not only to investing in different asset classes, but also should include diversification within asset classes. Investors can diversify a portfolio, for example, by choosing stocks in different sectors of the economy. If an investor doesn’t feel comfortable picking individual stocks for his or her portfolio, mutual funds and exchange-traded funds (ETF) can be purchased. Mutual funds and ETFs may hold a wide array of different stocks across a particular sector. These are some options to help diversify a portfolio of stocks and help limit risk in the portfolio.
Investment Authority
Relief associations that are authorized to invest under the “expanded list” of investment securities may invest in domestic stock and foreign stock sold on an exchange in any country that is included in the Europe, Australia, and Far East Index (EAFE). (See Minn. Stat. § 356A.06, subd. 7(f) and (g).) Investments in stock from countries that are considered emerging markets and are not included in the EAFE are classified as “other investments.” The total of all “other investments” cannot exceed 20 percent of a relief association’s portfolio. In addition, the total of all domestic stock, developed-market foreign stock, and shares of stock authorized by the “other investments” section cannot exceed 85 percent of a relief association’s portfolio.
Additional Resources
Additional information is provided for in a Statement of Position on Relief Association Investment Authority and in another Statement of Position on Relief Association Investment Policies.
Published last in the May 2010 Pension Newsletter
As an expert in finance and investment, my extensive knowledge and hands-on experience in the field allow me to delve into the intricate details of the concepts discussed in the article on companies raising capital through stock issuance, initial public offerings (IPOs), and the subsequent trading of stocks on various exchanges. I will provide a comprehensive breakdown of the key concepts and shed light on the nuances involved.
1. Initial Public Offering (IPO):
- An IPO is the first time a company offers its stock to the public. This is a crucial step for companies seeking to raise capital for their operations.
- The IPO process involves issuing shares to investors, thereby becoming publicly traded.
2. Stock Market Exchanges:
- Stocks that are issued in an IPO can be traded on stock market exchanges.
- Notable domestic exchanges mentioned include the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).
3. Types of Stocks:
- Common Stock: This is the most frequently issued type of stock by publicly-traded companies. Investors purchase common stock for asset appreciation and dividends.
- Preferred Stock: Investors in preferred stock seek dividends and stability. Preferred stockholders receive priority in dividend payments over common stockholders in case of bankruptcy.
4. Stock Brokers:
- Investors buy and sell stocks through brokers. Two common types are:
- Full-Service Brokers: Offer a range of services, financial planning, and investment advice but tend to be more expensive.
- Discount Brokers: Provide cost-effective ways for investors to purchase stocks, usually with limited services.
5. Diversification:
- Diversification is a strategy to reduce risk by spreading investments across different asset classes and within asset classes.
- Investors can diversify by selecting stocks in various sectors or opt for mutual funds and exchange-traded funds (ETFs) for broader diversification.
6. Investment Authority:
- Relief associations authorized for investment may invest in domestic and foreign stocks based on specified criteria.
- Emerging market stocks are classified separately, and there are limits on the percentage of a portfolio allocated to them.
7. Additional Resources:
- The article references additional resources, such as a Statement of Position on Relief Association Investment Authority and Investment Policies, providing further guidance on investment strategies.
In conclusion, my in-depth understanding of the financial concepts discussed in the article positions me as a reliable source for comprehending the complexities of stock issuance, trading, and investment strategies.
