Investment Basics - Stocks
Companies that need to raise capital to finance their operations can issue stock. The first time a company issues stock to the public is called an initial public offering (IPO). Once a company issues an IPO, the stock can be traded on a stock market exchange. When an investor purchases a share of stock, the investor is buying an ownership interest in the company. Companies trade tens of millions of shares of stock each day on stock exchanges around the world. The two most commonly-used domestic exchanges are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).
Types of Stocks
Companies may have different objectives when issuing stock. These objectives include whether a company wants to separate the shareholders’ financial interest in the company from the governance of the day-to-day operations, and whether the company issuing the stock wishes to have the stock traded on an exchange. Companies may issue common stock and preferred stock.
- Common Stock
Common stock is the type of stock issued most often by publicly-traded companies. Two reasons for investing in common stock are asset appreciation and dividends. Asset appreciation occurs when the value of a particular stock is greater than the amount an investor paid for the stock. Asset depreciation, which can also occur, occurs when the sales price of a stock is lower than the investor’s purchase price. Dividends are paid to shareholders from a company’s retained or current earnings. Common stock dividends are generally paid on a quarterly basis and are not guaranteed. When an investor purchases common stock shares in a company, the investor receives certain rights. For example, investors are able to vote in elections to pick a company’s leadership and on issues that are important to a company’s profitability and fiscal integrity.
- Preferred Stock
Dividends and safety are primary reasons for purchasing shares of preferred stock. Preferred stock does not offer investors the same level of capital appreciation as common stock, but it is usually not as volatile. Preferred stock shareholders may receive a consistent dividend payment. If a dividend is paid, the preferred stock dividend is paid first. In bankruptcy proceedings, preferred stock shareholders are paid before common stock shareholders.
Stock Brokers
Investors purchase stock through a broker. There are two common types of brokers: full-service brokers and discount brokers.
- Full-Service Brokers
Full-service brokers offer a wide variety of services and products. Many full-service brokers offer websites where clients can manage their accounts online and have branch offices so investors can meet locally with a financial advisor. Full-service brokers also usually offer financial planning services and give advice on selecting certain investments based on an investor’s goals and risk tolerance. Full-service brokers are usually more expensive than discount brokers.
- Discount Brokers
Discount brokers generally are the least expensive way for investors to purchase stocks. Many discount brokers do not operate out of offices, and instead offer services online or by phone. Usually, discount brokers do not provide investors with financial planning services or investment selection advice. Investors that use discount brokers typically know what they want to invest in and are looking for the most cost-effective way to purchase those investments.
Investment Authority
Relief associations that are authorized to invest under the “expanded list” of investment securities may invest in domestic stock and foreign stock. (See Minn. Stat. § 356A.06, subd. 7) Investments in stock from countries that are considered emerging markets and are not included in the EAFE are classified as “other investments.” The total of all “other investments” cannot exceed 35 percent of a relief association’s portfolio. In addition, the total of all domestic stock, developed-market foreign stock, shares of stock authorized by the “other investments” section, and “other investments’ cannot exceed 85 percent of a relief association’s portfolio. In addition, relief associations can invest up to 15 percent in emerging market equity and international debt combined, if the relief association is authorized to invest under the “expanded list”.
Additional Resources
More information can be found in our Pension Investment Basic Series found in the Investment Basics Topic.
Additional information is provided for in a Statement of Position on Relief Association Investment Authority and in another Statement of Position on Relief Association Investment Policies.
Last Updated May 2024