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How many times over the past few years have
you turned on the news only to hear that technology stocks are up, industrials
are down, or the Dow Jones has reached a new high?
Have you wondered
what, exactly, everyone is talking about when they discuss the stock market?
You may have participated in some of these conversations, and if you
invest in a mutual fund you probably own stock. But what exactly is a stock?
Shares of stock represent individual pieces of ownership (or equity) in
a corporation. These corporations issue shares of stock as a means of raising
business capital. Investors who buy these shares of stock either during an
initial public stock offering or later in a secondary market become partial
owners of the firm. Stocks shares are bought and sold on an open market and
earn income in two ways. First, stocks earn a long-term shareholder income by
payment of dividends, which are regular distributions of a company's profits to
its shareholders. Second, shareholders that trade more often also earn income
by transacting shares at varying prices. Prices of stocks are dependent on
investors’ expectations of the value of a firm at any point in time. For
example, if an investor buys shares of a firms stock at one price and sells them
at a higher price, the difference between the two prices is profit that the
investor earns. There are three basic categories of stock available for public
purchase: common stock, preferred stock, and stock options.