Boulder City Magazine® December '05 / January '06 Issue
by Wendell Whitman
Basics of Stocks and Bonds
If you’re new to investing, you might find it confusing. So, here’s a quick lesson on the basics of stocks and bonds.
Boulder City Magazine®
|Stocks represent ownership shares in a company. “Growth” stocks can provide the potential for capital appreciation, while “growth and income” stocks offer the opportunity for capital appreciation and dividends, which are paid from a company’s profits.
The greater a stock’s potential for growth, the greater the risks, including the potential loss of principal invested. Also, stocks are not fixed rate investments and may not distribute dividends.
When you buy a bond, you’re loaning money to a corporation, a municipality or the U.S. government in exchange for regular interest payments and the return of the bond’s face value at maturity. Bonds also carry risks. For example, you might not be able to reinvest the proceeds at the same interest rate or potential default by the issuer.
There is a lot more to learn about the investment world, but it starts with stocks and bonds. Get to know them.
What Causes Stock Prices to Move?
To understand how stock prices move, look at one key factor: earnings. Specifically, look at a stock’s price-to-earnings ratio, or P/E. To determine P/E, divide the company’s stock price by its earnings per share. If company A sells for $40 with earnings of $2.00 per share, it has a P/E of 20.
Of course, stock prices can change in response to investor sentiment, even if earnings remain stable. Suppose Company A’s earnings remain at $2.00 per share, but investors become excited about the company’s prospects and are now willing to pay 40 times earnings for a share. With a P/E of 40 and earnings of $2.00, the stock would then sell for $80.
Price movements aren’t always predictable. But once you understand the basic relationship between price and earnings, you can at least get a better idea of what’s in store for your holdings.
Contact Wendell at Edward Jones www.edwardjones.com.
P.O. Box 61901
Boulder City, Nevada 89006
Phone (702) 294-1392 Fax (702) 294-1392
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