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Definition of a Stock:In plain and simple, stock is share in the ownership of a company. Stock represents a claim on the company's assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares, equity or stock, it all means the same thing.

Why does a company issue stock? A company could keep the profits and earnings to the owner's of the company. It is only possible if a company does not extend its market share and stays in minimum profits limit. In order to extend market share or be market leader or get bigger asset, at some point every company needs to raise money. To do so, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock. A company can borrow by taking a loan from a bank or by issuing bonds and both methods are called debt financing. Conversely issuing stock in the market is called equity financing. The advantages in issuing stock is a company does not require to pay back the loan or interest payments along the way. No chances involving into debt and creating obstacle in expanding market share or adapting the advancement. However, it only leaves shareholder on hope the company will achieve its target profit and earning per share which leads the capital gains on holding a stock. If the trend shows  negative growth shareholder can sell instantly without having big loss. The first sale of stock by a company is called the initial public offering (IPO).

Risk Involvement in a Stock: this is a very important factor believing in Risk when you want to invest in the stock market. There is no guarantee what percentage you can get capital gain, where and when the stock price stops in up-end or low-end and how long it takes to get the profits. It is true, no company or institute can guarantee. However, you can measure the risk various ways. That's why, it is essential to do some "Home Work" on a company before you invest. The "Home work" should be calculating earning per share, total debt, relative price strength, profit margins, volumes, industry leader and so on. You can also reducing the risk by diversifying the portfolios ( selecting stocks from different industries) and measuring the correlation between a stock and market index. A less risk taker has options to invest in Bond ( fixed returns) or a company who provides dividends at the end of year. However, investors need to measure "expected rate of returns" first, and it should be high enough to compensate the investors for the perceived risk of the investment. Risk is contrary to the positive profit, but there is also bright side. Taking-on greater risk demands a greater return on the investment. This is the reason why stocks have historically outperformed other investments such as bonds or savings accounts.

How Stocks Trade: most stocks are traded on exchange, which are places where buyers and sellers meet and decide on a price. Some exchange are physical locations where transactions are carried out on a trading floor. Two trading floor are located in Bangladesh, DSE which is located in Dhaka, CSE is located in Chittagong. Chittagong stock exchange is expanded to compose of a network of computers where trades can be made electronically. We should distinguish between the "primary" and "secondary" market. The primary market is the first phase of stock where securities created before trading at the floor which is called IPO. In the secondary market, investors trade previously issued securities without the involvement of the issuing companies. The secondary market is what people are referring to when they talk about "the stock market."

What causes prices to change: stock prices change everyday by market forces. By this we mean that share prices change because of supply and demand. Any single time, if more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if  more people want to sell a stock than buy it, which is a greater supply than demand, then the price falls.

Understanding supply and demand is pretty much easy. What is difficult to comprehend is what makes people like a particular stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news is negative. There are many answers to this problem and just about any investor you ask has their own ideas and strategies.

That being said, the principal theory is that the price movement of a stock indicates what investors feel a company is worth. The company's value is different than its stock price. The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding. For example, a company that trades at $100 per share and has 1,000,000 shares outstanding ($100 x 1,000,000 = $100,000,000)has a lesser value than a company that trades at $50 but has 5,000,000 shares outstanding ($50 x 5,000,000 = $250,000,000). To further complicate things, the price of a stock doesn't only reflect a company's current value--it also reflects the growth that investors expect in the future.

The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, they aren't going to stay in business. Public companies are required to report their earnings four times a year. Many analysts forecast earning per share four times a year. If a company's results surprise (are better than expected), the price jumps up. If a company's results disappoint (are worse than expected), then the price will fall.

Of course, it's not just earnings that can change the sentiment towards a stock price. It would be a rather simple world if this were the case! During the dot-com bubble, for example, dozens of Internet companies rose to have market capitalizations in the billions of dollars without ever making even the smallest profit. As we all know, these valuations did not hold, In fact they are corrected by market value. There are factors other than current earnings that influence stocks. Investors have developed literally hundreds of these variables, ratios and indicators.

So, why do stock prices change? The best answer is that nobody really knows for sure. Some believe that it isn't possible to predict how stocks will change in price while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know as a certainty is that stocks are volatile and can change in price extremely rapidly.

The important things to grasp about this subject are the following:
1. At the most fundamental level, supply and demand in the market determine stock price.
2. Price times the number of shares outstanding (market capitalization) is the value of a company. Who is the market leader in terms of growth and has most relative strength and profit margin.
3. Theoretically earnings are what affect investors' valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors' sentiments, attitudes, and expectations that ultimately affect stock prices.
4. There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.

The Bulls, the Bears, and the Farm:  On Wall Street, the bulls and bears are in a constant struggle. If you haven't heard of these terms already, you undoubtedly will as you begin invest. The Bulls: a bull market is when everything in the economy is great, people are finding jobs, GDP is growing and stocks are rising. Things are just plain rosy, picking stocks during a bull market is easier because everything is going up. Bull markets can't last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued. If a person is optimistic, believing that stocks will go up, he or she is called a bull and said to have a bullish outlook. The Bears: a bear market is when the economy is bad, recession is looming, and stock prices are falling.

All About Dividends:
One of best way to invest in dividend stocks is the buy-and-hold strategy. That means you buy a dividend paying stock and hold it until you find another company paying higher-yield dividend for enough period of time. Basically you will have fixed income as dividends in addition to stock price gain or loss.

What you should consider to own a dividend stock forever, you want three things from that stock:
1. High yield dividends.
2. Continued payment history.
3. Payout ratio follows less than 70% on Net-income.

Dividend payments: when a company declares dividend usually quoted either as a Dollar/Taka amount or as a percentage. The Dollar/Taka amount is how much you will get paid per year on each share of stock you own. The percentage is calculated as the dollar/taka amount on each stock own divided by the current per stock price times 100 that is called dividend yield.
Yield explained: by looking at the percentage you can easily compare better investments strategy and grasp which stock will pay you most on your amount of investment. You will learn why dividends yield is crucial factor of choosing dividend paying stocks.
For example: if you purchase 100 shares of stock at $10 per share, you will have invested a total of $1,000 (100 shares X $10 per share = $1,000 invested)

How much you will get on every share of stock you own?

Letís say a company is paying 8% dividend yield, so there will be $80 earnings on your investment of $1,000 (1,000 invested X 8% = $80) $80 dividends per year.

This means that this stock pays you $.80 for every shares of stock you own (earnings $80/100 shares). Now, if another stock also paying $.80 per share, but the stock price of that stock is $20 per share. In your $1,000 investment you will have 50 shares a price of $20 per share. On your $1000 investment, on this second company you will earn ($.80 X 50) $40 every year.
Letís calculate the yield of second stock, it pays $.80 per share, and its share price is $20. So, the yield is (.80X100/20) 4%. Your plan is to get highest return on a fixed of $1,000 investment, keeping this strategy well-planned you can see that you get 100 shares on a first stock and 50 shares on a second stock, but both pay you exactly $.80 per share you own. In this scenario, you can comprehend which stock will pay more earnings with the $1,000 investments because of highest yield with same amount of payment per share.

Only your yield matters: note that the only thing matter is the yield for the price that you bought at. Even if the price of the stock goes up or down after you have bought it. You will earn same amount of money because you still own the same number of shares.
So, the key is to compare their yields.

Trend of continued payment: your only concern is to minimize the risk on every penny you investment. Then you research high-yield paying dividend stocks those companies have record of paying dividends for at least 4/5 years. History of dividends payment in the past for years most likely will continue to pay in coming years. Owning a share of stock is the same as owning a piece of a company. The dividends are paid out of what a company earns in Net-income and have savings. If a company does not have growth in net-income or enough cash savings in balance-sheet how long will a company continue to pay dividends? So, it is important that a company is able to pay dividends based on their profits over a year, and you want to make sure their payout is less than they earn in income. One way to determine this is by checking the stockís payout ratio.

Payout Ratios explained: the payout ratio is the amount a company pays in dividends divided the companyís income. Letís say a company pays out $1,000 worth of dividends and earns $10,000 income end of the year, then itís payout ratio is

10% ($1,000/$10,000 income times 100).

Now, if a companyís payout ratio greater than 100% means that the company is paying out more in dividends than they make in income. Think carefully about how long a company could continue to stay in business if they spend more money than they make. Obvious answer is not very long. And definitely not forever, which is how long you expect to own the stock.

Sustainable Payout Ratio: a sustainable payout ratio is generally considered less than 75%. That means a company pays dividends to investors out of 75% its income and remaining 25% of income is going to companyís reinvestment plan. A company needs enough cash to create new products, advertise to new customers, new business plant, and generally just keep continuous business growth. If no reinvestment is made then the companyís income could shrink over time.

What would happen when companyís income shrinks? How much would it hurt keeping business same phase of expansion? It shows that if companyís income slows down that will lead the payout ratio for the stock to go up. Letís say that the above companyís income drops to $5,000 from $10,000 over year and its payout payment is same $1,000 as before.

$1,000 dividends / $5,000 income = 20%.

So it is very important for a company to maintain growth in business expansion and its net-income by reinvesting in itself.

There should be a cap to maintain reasonable payout ratio which is standard for most companies. A payout ratio of 75% or less also provides a cushion for the company in case of hard times arrives. As economy slows down, most companiesí income also go down. If a company is paying 100% of the previous income as dividends, then they will have to lower the total dividends payment to match the current income.


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