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Stocks 101 - An Introduction
When a company grows, raising money for expansion is sometimes the most difficult obstacle to overcome. The choices they have include, borrowing money from a bank, seeking a venture capital investment, or they can sell a part of the business to investors by selling shares on the financial markets. The first time a company sells stock they are "going public" or what is called an "IPO" (initial public offering). The company contacts an underwriter who puts a value on the company, sets the initial share price, and handles the extensive regulatory hurdles before the IPO. The shares of stock are then offered for sale on a financial exchange and the company uses the proceeds to finance expansion, etc. Financial analysts often categorize stocks into the following categories: Blue Chip Stocks are some of the oldest and most consistently profitable companies that are lower risk and often pay a "dividend." (A dividend is money paid out to share holders each quarter based on the company earnings.) Growth Stocks are estimated to have greater earnings but don't pay dividends as profits are reinvested for growth. These stocks can be more volatile. Over the last 15 years most tech stocks have been in this category. Speculative Stocks are the most risky, but also have the most upside potential. There are two ways to profit from stocks: Capital Gains - You buy 100 shares of ABC Company at $5.00 a share for $500. In one year the share price goes to $7.00. Your 100 share investment is now worth $700 (a $200 profit. When your investment increases in value this is known as a capital gain. Dividends - You buy 100 shares of ABC Company at $5.00 for $500. Each share pays a quarterly dividend of 25 cents. You are now making $25.00 a quarter just from holding the stock. The profits from capital gains and dividends are taxable. However, when investing in the stock market you should focus on profits and earnings, not taxes. As you hold a stock it grows and increases in value giving you increased profits, possible dividends, and sometimes stock splits. History shows that the longer you hold a stock the more money you will make.
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