July 06 Topic - "The Stock Market"

01.  A little Stock Market History
02.  The Process of buying a stocks and the different types of stocks
03.  Brokers & The SEC
04.  5 Common Questions and Answers

1.A little History

The stock market has been around for 200 years. You are probably wondering how that could be since there was no major corporations or even Wall Street back then. Let me explain how this all started. It started on a dirt path in East Manhattan 200 years ago. At that time it was not money or stocks being exchanged it was silver. People traded silver for ownership in cargo. Although it is a bit different, the idea is the same as today. During the American Revolution the government needed money to fund the war supplies.

The government decided to sell bonds. Bonds which are still popular today are purchased for a set price and held onto for a specific amount of time. After the specified amount of time expires, the bonds are turned in for a profit. Aside from bonds the bank offered shares of their company in order to raise money. That is the same as our stock market today.

Wall Street had become the place where most transactions took place. So, in 1972 twenty four men signed the agreement that started the New York Stock Exchange. They agreed to certain terms such as selling shares of companies, charging people fees to buy or sell for them. Not long after founding the NYSE everyone wanted to get into it. Stocks that the NYSE would not sell were being sold on the curb. People referred to these stocks as "curb stocks" which have now become the American Stock Exchange. As you probably know the NASDAQ has joined the AMX and the NYSE. The Stock Markets have a huge impact on the economy.

2. The Process of buying a stocks and the different types of stocks

Here's the process of purchasing a stock. First you should always do some research and decide which stock you would like to purchase. Remember it is a gamble and there is absolutely no guarantees that you will make money. With that in mind, you call a broker and inform them of the stock you are interested in and how much you would like to buy. From that point the broker contacts the person who is working in the stock exchange and lets them know which stocks you want. That person, known as the floor person (broker) goes to the spot that is allotted to that stock and buys the stock for you. He lets his firm know that he has purchased it, and you are now the owner of a piece of that company.

An open mutual fund is when you give the company a certain amount of money and the broker takes your money along with other investors and buys stocks and bonds. The money is invested for a certain amount of time depending on what was agreed to by you. After the money is withdrawn you receive your profits and the broker receives a fee or commission for his services.

The other kind of mutual fund is known as a closed mutual fund. These funds are similar to open funds because both are handled by professionals. The difference between the two is that the closed mutual fund is actually used to buy shares of stock. These stocks are almost the same as any other stock on the market meaning they are traded. The huge difference is that instead of a company using the money to improve their company it is instead used to invest. They invest the money and you receive profits.

3.Brokers & The SEC

You have now given your money to a complete stranger who calls himself a broker. Is there any guarantee that he will invest it like promised? Yes, there is a guarantee and actually it is a whole organization called Security Exchange Commission, also referred to as SEC. Not only does this organization make sure that everything is legal that the brokers are doing they also make sure that the companies who are selling stock are being honest and legal.

The SEC has set rules and guidelines for companies and brokers. The SEC makes sure that no one is using insider information. As in the case of the Martha Stewart trial, insider information is basically information some one obtains about a stock or company that the pubic does not know. The person then uses that information for their financial gain. Brokers are also watched very closely by the SEC to protect you, the investor. They are watched to make sure that they are buying at the lowest price and selling at the highest for you. The SEC wants to make sure that the investors best interest is being put first.

You are probably wondering what makes the market change so much each day. The truth of the matter is there are many factors that affect the stock market. A major factor is how well a company does which I am sure you already knew. Other factors include the time of the year, interest rates, the economy, and publicity. Believe it or not publicity has a huge impact on a company. Think about it a stock is only worth what the public will pay for it. Therefore, if you turn on your national news and see the owner of a company who is now being investigated for embezzlement and other charges would you invest in his company? On the other hand publicity can be a good thing for a company. If a company has a new product that is expected to be the best seller this year, then I would run out and buy that stock wouldn't you? Publicity can work either way for the stock market.

4. Common Questions and Answers

What is the stock market? The word stock refers to a supply of money that a company has raised. This supply of money has come from people, also referred to as investors, who have given the company money hoping the company will succeed. In return if the company does well the investors will receive more money than they invested. Market is a place where things are bought and sold thus stock market refers to stocks being bought and sold.

Why would a company issue stock? Most companies need money to grow. The money has to come from somewhere. Obviously they could take a loan from the bank and then pay the bank back. The majority of companies though do not want to go into debt. With stocks you do not pay the stock holders back they eventually will earn the money when the company does well and the stock increases.

Can all businesses offer stock? No not all businesses can offer stock. Businesses that are run by one person or a few people can not offer stock. Only corporations can offer stock because they have a special legal status.

Why would a person want to buy stock? A person who owns a stock now owns part of that company. If the company does well then you share in those earnings. Depending on the stock it is often times more beneficial to be a shareholder than to leave your money in a bank or mutual fund. The earnings can be a lot greater, however the risk is very high that you can lose all your money also.

As a stockholder of a company do I have any rights within the company? Most companies usually give stockholders the right to vote. They are often allowed to vote on who should be elected on the board of directors, if the company should expand and buy other companies, and various other decisions that can affect the company in a big way. A shareholder can usually vote once for every share they own. For instance, if a shareholder owns 200 shares they are permitted to vote 200 times. The more stock you own the more influence you share within the company.

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Got a question? Then contact our Education Team on 561-883-2398 Ex.310 United conducts regular seminars on financial education, including "How to Budget", come along and join us. To reserve your seat contact our Education Team on 561-883-2398 Ex.310

Newsletter 07
Rev.1
July, 2006