| So, understanding the stock market...OK...what the | | | | agreed-upon price. |
| heck is the stock market anyways? | | | | The underwriter then attempts to sell those shares |
| The basic function of the stock market is to provide | | | | to the public for a higher price, thus profiting from |
| capital resources for corporations that seek capital to | | | | the transaction. |
| expand their operations and finance their growth. | | | | Stock Classifications |
| If you make your money available to theses | | | | Stock Types There are two classifications of stock: |
| companies, you help them expand and prosper. | | | | Common and Preferred. |
| Companies that issue stock shares to the public are | | | | Common stock is usually what is issued to the |
| considered "publicly held" or "publicly traded" | | | | general public. The term common Stock doesn't carry |
| companies. Stock shares represents ownership of a | | | | any negative connotations, but rather indicates that it |
| corporation. As a shareholder, an investor owns a | | | | is the "standard" stock the company has offered. |
| portion of the company's assets and profits. | | | | Common shareholders have voting rights. |
| With ownership comes risk and a shareholder assume | | | | And as the word suggests, "preferred" stock has |
| the primary risk if a business does poorly. However, | | | | certain advantages over common stock. First, |
| they also stand to make the greatest return if it | | | | preferred shareholders are paid dividends before |
| succeeds. If he is smart, the shareholder would be | | | | common shareholders. And if a company isn't doing |
| wise to be understanding the stock market too. | | | | well, the Common stock dividend is eliminated first. |
| When an entrepreneur starts a company, he often | | | | Second, is if a company goes out of business, the |
| looks to family and friends for start-up capital. As the | | | | owners of preferred shares have prior claim to any |
| company grows, it will need more money, or in other | | | | assets that remain when the company is dissolved |
| words capital. Those who survive those tough early | | | | and after bond holders and other creditors have |
| years, when most businesses fail, will look for a bank | | | | been paid. Owners of common stock are the last in |
| loan. | | | | line to pick up the pieces of the fallen corporation. |
| Loans carry high cash costs, in the form of interest | | | | There are disadvantages to owning preferred shares. |
| payments. Eventually, if the company grows enough, | | | | Preferred shares have no voting rights. Also, the |
| its owners may choose to issue stock shares in the | | | | price of preferred shares tends to rise more slowly |
| public markets. Understanding the stock market is | | | | that the price of common shares. |
| very important to know for these entrepreneurs. | | | | As owners, common shareholders elect a |
| When you hear that a company is "going public", it | | | | corporation's Board Of Directors. The board of |
| means that the company is issuing shares of | | | | directors is a group of individuals, which are |
| ownership for sale in the public marketplace. This | | | | responsible for managing the affairs and growth of |
| process takes place during the initial public offering, or | | | | the corporation. The power of the board usually |
| IPO. | | | | extends beyond that of the founder of the |
| The IPO is a first-time offering of stock for sale to | | | | company. |
| the general public. The IPO process involves a | | | | The power resides in this board because the board is |
| number of people in addition to the company owners, | | | | in the position of representing the shareholders as a |
| and can be a rather complex undertaking. The | | | | group. This board must be educated in understanding |
| company itself must be clear in understanding the | | | | the stock market. |
| stock market. | | | | Normally, owning one share of common stock gives |
| To go public and issue an IPO, the company must | | | | you the power of one vote. If you have control a |
| use and find an Investment Banking firm that is willing | | | | large number of shares, you will have more influence |
| to underwrite the public offering. The Investment | | | | on the outcome of elections. |
| Banking firm, or underwriter, will do their best to sell | | | | At worst, common shareholders can lose their entire |
| the shares. They may reserve the right to sell the | | | | investment if their company fails. In such a case, a |
| offering on an all or none basis, which means that if | | | | company may be sold or liquidated and its remaining |
| they cannot find buyers for all the shares to be | | | | assets distributed among creditors, such as banks |
| issued, they may call off the entire offering. | | | | and bondholders. Shareholders would receive |
| The underwriter's profit in this case is made by a | | | | proceeds only after theses more senior claims are |
| commission charged for selling the stock. If the | | | | satisfied. |
| underwriter agrees to a firm commitment to sell the | | | | In order to make money, the individual shareholder |
| entire offering, usually the first move is to buy all the | | | | must sell his shares back to onto the market, |
| shares that are going to be publicly offered at an | | | | through a Stock Exchange and their Stock Brokers. |