The important of the stock market

Investing in the stock market could be an important part of your long term saving strategy when you expect a marginal profit from stock’s purchasing and selling prices. By doing so you will be buying into ownership of a corporation or is so-called becoming an investor, which is eligible to receive dividend from the company in a portion of shareholding year on year depending on its operational profit.

More importantly, you would expect the stock price to be rising over the time according to the company’s performance and the economic situation in marginal gaining of the stock selling price.

However, rate of return depends on the company’s success in their respective business.

Investment in the stock market has risks from market price recession or the company’s losses and insufficient liquidity. In this case, shareholders will receive return after debtors.

The stock price fluctuation is another important factor to reflect the intrinsic value in rate of return.

Ok, it has risk. Why people keep investing in the stock market?

The easiest way to compare is it gives a much higher rate of return than bank deposit, which is generally considered as the safest investment with high rate of liquidity. In fact, the bank deposit rate is fixed and not rise fast enough to cover rate of inflation rate under the certain economic condition.

Bank deposit can be turning into loss if the inflation rate is rising too rapid and too high.
Then long term investment can resolve this problem as well as preserve the intrinsic value of investing money in form of dividends and warrant for new issued of shares.

Moreover, acumen investors may generate a significant capital gain by selling the stock at higher prices.

Commodities of the stock market

Commodities that are traded in the stock market involved in the following securities (quoted from Investpedia and other Sources):

• 1. Common stock

Common stock is a security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company’s assets only after bondholders, preferred shareholders and other debtholders have been paid in full.

If the company goes bankrupt, the common stockholders will not receive their money until the creditors and preferred shareholders have received their respective share of the leftover assets. This makes common stock riskier than debt or preferred shares. The upside to common shares is that they usually outperform bonds and preferred shares in the long run.

• 2. Preferred Stock

A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.

The precise details as to the structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation). Also known as “preferred shares”.

There are certainly pros and cons when looking at preferred shares. Preferred shareholders have priority over common stockholders on earnings and assets in the event of liquidation and they have a fixed dividend (paid before common stockholders), but investors must weigh these positives against the n

• 3. Debenture

A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.

Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment. An example of a government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill). T-bonds and T-bills are generally considered risk free because governments, at worst, can print off more money or raise taxes to pay these type of debts.

• 4. Convertible Debenture

Any type of debenture that can be converted into some other security.

• 5. Warrant

A derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a “sweetener” to entice investors.

The main difference between warrants and call options is that warrants are issued and guaranteed by the company, whereas options are exchange instruments and are not issued by the company. Also, the lifetime of a warrant is often measured in years, while the lifetime of a typical option is measured in months.

• 6. Short-Term Warrant

Short-Term Warrant is a warrant commonly has a lifetime of 2 months period.

• 7. Derivative Warrant: DW

Derivative warrants fall under the category of derivative investment instruments. They have a minimum life of six months from the date of issue or grant and a maximum life of five years. The underlying assets of derivative warrants can be ordinary shares, market indices, foreign currencies or a basket of shares. The issuer of derivative warrants may not be the issuer of the underlying assets, but should hold or have a right to hold the underlying assets. On exercising the derivative warrants, investors may receive the underlying assets or an equivalent amount of cash. The issue and exercise of derivative warrants has no effect on the quantity of the underlying assets (such as ordinary shares). They provide the market with instruments which may be used for hedging or investment purposes.

• 8. Unit Trust

An unincorporated mutual fund structure that allows funds to hold assets and pass profits through to the individual owners, rather than reinvesting them back into the fund. The investment fund is set up under a trust deed. The investor is effectively the beneficiary under the trust.

The success of a unit trust depends on the expertise and experience of the management company. Common types of investments undertaken by unit trusts are property, securities, mortgages and cash equivalents.

In the U.K. the term “unit trust” is synonymous with “mutual fund” as it is used in North America.

A unit trust is managed by professional assets management manager in a form of portfolio and has high volume of investment fund with much greater negotiation power than individual investor.