t some point, many companies have to raise money in an effort to start or grow their business. This attempt to raise money is usually done by either; 1) borrowing the money or 2) raising money from investors by selling shares (or a stake) in the company. These shares can be private in that they are not traded on any stock exchange and often times the owner of these shares are simply the founders of the company. Or, these shares can be publicly traded on a stock exchange, where there might be thousands of small owners who can buy and sell their ownership position on a stock exchange.
As with the owners of most companies, their goal is to increase the value of the company as well as the income and cash flow that the company produces. An owner of a stock will normally have the same objective. As such, investors hope that the value and cash flow of a company increases, which in turn should increase the share price of their stock and the potential dividends that get paid to the shareholders. Below are some important items to consider when buying stocks.
Shares of Stock Equal Ownership
When you buy a share of a stock, you are purchasing a share of ownership in a company. That company is collectively owned by all the shareholders and each share also represents a claim on the company’s assets and earnings.
There Are Different Kinds of Stocks
The most common types of stocks that investors hear about are publicly traded stocks, which are companies whose shares trade on stock markets such as the New York Stock Exchange. Stocks can however, be purchased and owned privately.
In addition, stocks can be categorized into company size, company sector and company growth patterns. For example you could purchase a Large Cap Stock (large company) or Small Cap Stock (small company). You could purchase technology stock or an energy stock. You could purchase a growth stock or a value stock. In each of these examples you are looking at companies of different size, different industry and different objectives for growth and income to investors.
Past Performance is No Guarantee of Future Results
Stock prices are based on projections of future earnings of the company. A company may have a strong track record but even the most solid and established companies can slip and when they do, their stock prices can also fall.
Do Your Homework for Utah Stock Portfolio Management
Warren Buffet, one of the most recognized investors of our time, has always suggested that investors buy stocks of companies that they understand. Proper valuation, due diligence and tracking are important steps involved with purchasing individual stocks. It is for this reason that most investors purchase stocks through a Mutual Fund, where the valuation and due diligence process is performed by experienced professionals. As with any investment, this due diligence performed by experienced professionals does not eliminate the risk associated with mutual funds and investors should review the prospectus of each fund prior to investing.
Those looking to purchase individual stocks need to understand that even companies with good earnings and projected cash flow, can still lose money in a volatile stock market. We believe that the principal of analyzing good companies with solid earnings and then holding those stocks and not making “panicked” decisions can potentially be a benefit in the long term. We have not seen much success with investors seeking to “Day Trade” or make frequent attempts to “time the market” in an effort to make quick money. We suggest a good diverse mix of holdings and we suggest a professional be used to help in this process.