Monday, February 14, 2000
YOUR MONEY
Stocks: Here are the basics
BY AMY HIGGINS
The Cincinnati Enquirer
So there's no such thing as a dumb question. In that case, these are obvious questions that never get asked, much less answered:
• When I buy a stock, what exactly am I buying?
The simplest explanation is to say that you are buying a portion of a company. In most cases, however, buying one share of stock would only get you one very, very small fraction of the company — such as one one-billionth.
• When I buy a stock, who gets my money?
Whoever you bought the stock from. Think of a company's shares like any other product: They have a cost and an owner. That owner might be another investor, a broker (the middleman) or the company itself.
You'll typically buy the shares on an exchange or a market. Think of it like a giant flea market. You could be buying from people just like you, even though you'll never see them, because you'll usually go through a brokerage or investment firm.
• What does it mean if a company goes public?
Most companies in the country are owned by either a single person or a small group of people. These are called private or closely held businesses.
But the owners of those companies can also choose to let outsiders in by allowing shares (or small portions) of their companies to be bought and sold on public exchanges.
This is called going public.
A company will “go public,” or sell shares in itself for the first time, in order to raise money. The millions this initial public offering (IPO) generates typically are used to expand the company. When you buy shares in an IPO, the company gets your money — just as if you went to the factory-direct store.
It is through IPOs that many of the richest Americans got their wealth. When a company goes public, usually only a small fraction is sold. Much of the rest of the shares are held by the company's founders or executives.
For example, Bill Gates still owns more than 15 percent of Microsoft stock. His portion now is valued above $82 billion.
• What's a paper gain or loss?
Take Bill Gates again. If Microsoft's stock price goes up, so does the value of his part of the company. When the value goes up, it's called a paper, or an unrealized, gain. He won't have more dollars in his checking account or cash in his wallet. He can't use the gain unless he sells the stock.
Same for a loss. If the stock price goes down, the value of his holdings goes down. That probably won't mean he'll have to sell the boat or skip a mortgage payment.
In other words, it usually doesn't affect cash flow.
• What is the Dow Jones Industrial Average? What does it mean if the Dow increases?
The Dow is the most closely watched and heavily publicized market barometer. Just as its name implies, it was originally an average of several stock prices. The stocks have changed, as has the calculation to derive it. But the idea is still the same: It tracks a group of stocks, currently 30.
Typically, whatever direction the Dow moves in is the general direction of much of the stock market.
• What are bull and bear markets, and why are they called that?
You probably haven't heard much about bear markets recently. By most accounts, we haven't had one since 1977 to 1982. That was when stock prices generally moved down.
Since 1982, however, stock prices have generally moved up. And that has made it the longest bull market in history.
Down markets are called bear markets because a bear attacks with its claws pointed downward. Bulls attack with their horns pointed upward — hence an upward-moving market is called a bull market.
Amy Higgins writes about personal finance for The Enquirer. You can reach her at 768-8373; ahiggins@
enquirer.com; or Your Money, The Cincinnati Enquirer, 312 Elm St., Cincinnati 45202.
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