The stock market of today’s society Essays

The stock market of today’s society Essays The stock market of today’s society Essay The stock market of today’s society Essay The stock market of today’s society has turned into a fast paced digitalized system of transactions between some of the world’s wealthiest power brokers.   In order to fully examine the functionality of the stock market and how the entirety of the system works, a thorough examination of how the stock market works is important having an overall understanding of investment and stock selection. A stock is defined by Charles Schwab, a leading stock brokerage firm, as â€Å"an instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporations assets and profits† (Charles Schwab, npg).   In basic terms, a stock is a claim of ownership on a corporation.   However many shares a particular individual has of a company determines how much ownership of the overall company this individual possesses.   If an individual retain fifty shares of a company that has one thousand total shares, he or she has five percent ownership of the entire company.   Just as stocks are claims to ownership, the stock market is the marketplace where stockholders can trade, sell, and buy each other’s ownership of companies.   This marketplace works much like any supermarket, where individuals will use money or their own stocks to trade for ones from other people (Smith 103).   This mutually benefici al marketplace is the foundation of the stock system. Stocks however, vary between many different types.   Not all stocks can be purchased by anyone at any given time.   The most important classification of stocks is â€Å"common stock† and â€Å"preferred stock†.   Most shares of stocks are called â€Å"common shares† because these are the shares that are most available within the stock market.   Common stock entitles the owner certain privileges and power over the company because it represents partial ownership of the company.   This means that common shares allow the owner the right to vote in many corporate matters, and they also receive votes to elect the company’s board of directors.   They also receive the ability of â€Å"preemptive rights† which allows them to by stocks upon a split of the stock to maintain the proportional ownership of the corporation that they maintained before more stock was issued (Sincere 120).   The main advantage of the common stock is the power conferred upon the owner of the stock.   But it has the drawback that common shares are the last shares that receives dividends, and it also is the shares to get paid back in case of a bankruptcy within the company. Preferred stock in contrast does not confer nearly as much voting power to the owner of the stock but offers much more security.   Preferred stocks are the first to receive dividends and the first to receive payments in case there is a bankruptcy (Faerber 54).   Therefore they guarantee the owner a very low risk investment but lack the ownership control value of common shares.   Both of these two stocks have their individual drawbacks but each also has their advantages. The management and investment of stocks is an extremely risky business, where many times sound investments could turn into bankruptcy candidates in a matter of days.   The danger posed by stocks is that they are extremely volatile to the affects of public opinion.   Therefore when making stock investment decisions can many times turn into a roulette wheel rather than sound investments.   An example is the catastrophe surrounding the collapse of Enron in late 2001.   Enron, one of the country’s biggest energy producers collapsed and filed for bankruptcy in late 2001, and its stock plummeted from blue chip value to almost worthless in a matter of days (Fisher 151).   People who invested heavily into Enron because of its security soon learned that its financial blunderings had made their perception of the company change and that led to the immediate nosedive of Enron stock.   Enron is an excellent example of how stocks can change from blue chip, solid investment stock , to worthless.   Therefore a risk always exists when investing in stocks, even those that are perceived to be irreproachably solid stocks. Another risky method of stock investment involves investing in high risk stocks.   When investing in corporations that are just starting its development or does not have an identifiable product on the market, the possibility of losing the invested money is always present.   One example is the rise and fall of Orion Enterprises.   This corporation rose over 300% in the course of two weeks during 2004 because of the hype surrounding its development of a new medicine that would affect the recovery of patients after chemotherapy (Smith 21).   However, in the wake of its rejection from FDA approval, the stock subsequently plummeted to nearly the zero dollar mark and caused the bankruptcy of the corporation (Smith 23).   The collapse of Orion is an example of how stocks can be extremely risky to purchase and trade because of the unexpected fluctuation of public perception. However, investment in stocks can also yield large rewards.   Stocks represent ownership in corporations, and when corporations change from an extremely small operation to a multinational and multibillion dollar enterprise, and then the original investors are the ones who benefit the most.   Given the example of Microsoft, which increased its stock value so much from 1986 to 1998, that an initial investment of ten thousand dollars in 1986 would have yielded a return of over six million dollars in 1998 (Siegel 15)?   This shift in the rate at which stocks can become instant earners is another example of how powerful the stock market is, and the rewards that one could extract from making wise investments.   Another example of a reward derived from stock investment is investment into high risk markets.   Stocks especially within the technology sector are highly volatile, but at times they can yield extremely high profit in a short amount of time.   The transition of google.c om from being a low yield stock to one of the most consistent and most reliable stocks on the market today occurred in less than three years.   This serves as an example of how wise investment decisions could actually yield extremely good profit margins. Although high risk stocks can make excellent returns, low risk stocks can also yield excellent monetary rewards given a proper amount of time.   Although the common perception that blue chip stocks are great earners have been imprinted on modern investors, the reality of the situation is quite different.   Some blue chip stocks such as Cisco, has seen a steady increase on investment of 8% over the course of the past six years.   Which means that for a moderately low risk investment, a stockholder might expect a very satisfactory yearly return of 8% on their investment?   Another example of a low risk and middle ground investment is in quality customer service or restaurant corporations such as McDonald’s, which has consistently been on the rise since it opened on the market (Siegel 15).   Because these corporations depend on a much larger market than other smaller companies, they present a very steady and consistent long term investment.   Overall the advantage of having low risk stocks is that they are extremely easy to identify and they present consistent returns rather than erratic ones.   They are also long term investments and therefore require much less supervision.   However, it most importantly makes much less profit than high risk stocks because it has already neared its peak in development and thus lacks the ability to expand quickly because of its relative present size. Therefore a savvy stock investor would have a portfolio that achieves a risk neutral approach to investment that has a balance of both high risk and low risk stocks.   Such a portfolio takes advantage of the stability granted by blue chip stocks to fund the money of more risky ventures that could either yield great profits or losses.   The net benefit of diversification of the portfolio is that it allows for the dispersal of risk within the stock portfolio.   Overall having such a balanced stock ownership will permit the stockholder to have more control of his financial situation to avoid great losses in the stock market.