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part of your investment portfolio. Some assets may be held in your brokerage account and some may be owned outside of your account, but they are all part of your portfolio. We’ve already learned about cash, which is money in a savings or other account that is liquid. Let’s check out the other asset classes: Asset Class: Equities Stock. You have already learned about equity in the context of homeownership. Equities refer to shares of stock in a corporation . In a way, they are similar because they both represent ownership value . Equities make up a very popular asset class. When an investor buys stock, they actually own a piece of the corporation. For example, if you went out today and invested in one share of Google Corporation, you would actually own a tiny piece of that company — just a teeny, tiny piece (like 1/700,000,000th) because Google has about 700 million shares of stock outstanding, but an ownership interest nonetheless. Equities are purchased through the stock market , which is exactly what its name indicates: a public market for buying and selling shares of stock in companies . How Equities Build Wealth. Equities build wealth by increasing in value if the company or the industry, such as the healthcare industry, makes money or is expected to be profitable. Increased sales revenue, product innovation, and efficient operation are examples of things that increase the value of a corporation’s stock. Investors also try to predict how changing conditions in the economy will effect different corporations and buy equities in companies that are likely to benefit from those changes. Some investors buy shares of companies whose stock prices have fallen due to poor performance or because of an industry slow down, hoping they will rebound over time and increase in value. The Apple Corporation example used at the beginning of this lesson is an extreme case of appreciation of stock value. Few have that kind of growth! Historically, however, investing in the stock market on a long term basis has provided good and steady rates of return on investment (ROI) . Common vs. Preferred. There are two kinds of stock: common and preferred. The key difference has to do with dividends , which are a portion of the company’s profit . Preferred shareholders receive regular dividend payments quarterly or annually. There is no requirement that a corporation pay a dividend on common stock. Investors do not get rich off dividends, because they usually consist of just a small amount, like 50 cents per share. However, some investors, like retirees, like to own preferred stock because it provides reliable and regular payments, which is called an income stream . Ratings on Stocks. Stocks are professionally rated on their prospective performance . Investors use these ratings to help them decide whether to buy or sell a particular stock. Commonly used ratings are “strong buy”, “buy”, “hold” and “sell” . Some ratings systems use the terms “outperform” and “underperform” . If there is a positive event in a company, such as an increase in earnings, a favorable resolution of a lawsuit, or the launch of a new product, its shares may be upgraded . For example, analysts may decide to change the stock rating from buy to strong buy. If there is a negative event, such as the resignation of a popular CEO, the discovery of a product defect, or the company’s earnings are not as strong as predicted, its stock may be downgraded . Two widely known ratings analysts are Merrill Lynch and Wachovia. PRODUCT PREVIEW
THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY 201
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