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Introduction to Investing - What Are Stocks?


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Basics for Beginners

Issuing and selling shares of stock is a common method corporations use to raise capital in order to carry out the goals of the company, such as expansions and improvements, without borrowing large amounts of money. Without the income generated by the sale of shares of stock, many companies would not be able to come up with the cash to accomplish these goals.

Sometimes corporations sell shares of stock simply because the owners want to reduce their holdings in the company and generate cash for personal use.

When you own stock, you actually own part of the company, and the value of your shares goes up and down as the company's stock value fluctuates. It's important to remember, though, that when stock prices go down, you don't actually lose anything unless you sell the stock while the price is lower than what you paid for it. As long as you hold onto the stock, you can recoup any "paper" losses the next time the stock price rebounds (assuming that it does).

Stock prices often have more to do with investors' perceptions than with the actual financial standing of the company. Some Internet stocks, for example, started trading at several hundred dollars per share but then settled down into less than $100 per share.

Stocks don't offer a guaranteed return, so choose them carefully.

Each publicly traded stock is usually traded on just one of the many US and international stock indexes. The best known index is the Dow Jones Industrial Average (DJIA), but only 30 stocks are included on this exchange. You could have investments in a hundreds of stocks and not be directly affected by rises and falls in the Dow Jones, if your stocks are traded on other exchanges.

For more in-depth information on stocks, see About.com's Stock Site.

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