Stocks 2 Essay, Research Paper

Stocks are shares in a company. When you

invest in a company’s stock or buy its shares,

you own part of a company as demonstrated

when Lemo sold half of its ownership or

stocks to Tom. If the company makes money,

your stock will increase in value. But, just as

in short-term investment and bonds, there are

pros and cons to stock investments.

Advantages

Stocks have a long historical track record

of outperforming other investments, such as bank deposits, money-market funds,

CDs, bonds, real estate, and commodities. See the chart below for a comparison

from 1945 to 1994.

A stockholder or shareholder has voting rights that bondholders and bank

depositors do not have.

Disadvantages

Stock prices often go up and down. They are never guaranteed.

A shareholder may lose part or all of his money.

Comparison of Annual Rates of Return on Selected Investments

(%)

1945 – 1994

1984 – 1994

1989 – 1994

Inflation

4.4

3.6

3.5

S & P 500

11.9

14.4

8.7

U.S. Treasury Bills

4.7

5.8

4.7

U.S. Govt Bond

5.0

11.9

8.3

Corporate Bond

5.3

11.6

8.4

Residential Housing

N/A

4.3

2.9

Gold

6.4

0.7

0.1

Silver

4.6

-4.2

-0.8

Source: Ibbotson Associates Annual Yearbook, Ibbotson Associates, 1995.

Stocks : The Highest Performer Over Time

In the long run, stocks have beaten alternative investments such as bank accounts,

bonds, real estate, and commodities. A Chicago consulting firm, Ibbotson

Associates, has compiled data to show that stocks are the way to go. As shown in

the chart below, stocks, represented by the Standard & Poors 500, doubled the

compound annual return of T-bonds issued in 1926.

Stock Ownership

If you buy a share or shares of stock in

a public company, you become a part

owner of that company. As a

shareholder of one share of Microsoft,

you enjoy the same basic privileges and

rights as Bill Gates who owns millions

of shares.

As a shareholder, you have the

privilege to receive quarterly reports

and an annual report informing you of

the financial health of the company.

These reports are just like report cards

you receive from school. The quarterly

reports tell how much money the

company has made or lost and business

activities during the reporting period.

The annual report is a combination of

all quarterly reports and is often printed

with fancy charts and photographs. It

gives detailed business and financial information about the company. As a

shareholder, every year you ll be invited to attend the annual shareholders meeting,

where you can ask Mr. Gates questions about Microsoft.

In addition, you will have the right to vote for Microsoft s board of directors, the

shareholders representatives who keep track of the important issues of the

company. They will, in turn, hire officers such as Chairman Gates to run the

company.

Most companies use a one-vote-one-share system. Even though your one share of

Microsoft does not count much against Mr. Gates s millions of votes, the company

takes each vote seriously. If you cannot go to the annual shareholder s meeting, they

will send you an absentee ballot.