MONEY 3 - STOCKS/INVESTMENTS

THIS IS MY THIRD POST ON UNDERSTANDING MONEY TOOLS

Money! Money! Money! We are going to explore investments in common stocks and the various aspects of “investment tools”.  In this article we will touch upon only a few parts, and then we will continue in future articles.

The first US stock exchange is dated back to our founding fathers and good, old Ben Franklin. Common stock is a vehicle in which a person can own part of a business or company.  There are several types of stock.  Some stock ownership is private, some can be bought and sold with easy liquidity, some is restricted and cannot be sold or must be offered back to other owners in the company.  There can be preferred stock, different classes of stock, stocks that render a dividend yield, small, mid and large cap stocks, and more.

Why does an owner of a company offer stock?  Money!…. to raise money for operations and growth, or to sell the company.  Most people think of publicly traded stock when talking about stocks in general, perhaps over lunch or dinner. Why would people want to take their company public and incur all the expense to go public, ongoing expenses and lose total control?  Money!  A private company if sold might fetch 2 to 3 times earnings while a public company’s stock might trade for 15-100 or more times pre-tax net earnings. 

Let us concentrate our focus here on publicly traded companies and learn a bit about how this all happens.  When incorporated a company authorizes a certain number of shares of stock by the Articles of Incorporation and then issues a certain number of shares from there to shareholders.  This may include shares for employee stock options.  The third stock is treasury stock typically held by publicly traded companies.

When a company “goes public” with an “initial public offering” or “IPO” it does so with an investment banking firm, (stock brokerage firm).  To this point they believe they have something of value to offer people interested in investing and hopefully make money.  They must go through a “due diligence” process controlled by state and federal regulations, and this needs to be done under time constraints to insure that the financial numbers, members of management, board members and material facts are current. Sometimes companies put several of their asset holdings together under one umbrella to go public, this being called a “roll-up”.

When it is time to go public so that a company’s stock can be traded freely, the process has been managed by an investment firm referred to as the “managing firm”, they will be a market maker, hold stock in their house name and select other firms to be market makers for the stock.  The managing investment firm has selected which “exchange” to be traded on, the most familiar being the New York Stock Exchange and the NASDAQ. 

The asset value and stock price plays a part of which exchange the company will be accepted on and also the company’s industry.  For instance many of the high tech companies are on the NASDAQ.  For small cap stocks including stocks trading below a certain price there is the “penny stock” exchanges and these stocks are “pink sheeted”.  The risk on these companies is much higher.  The price per share of stock can be very low such as a few cents.

Now it’s time to “go public”.  The managing brokerage firm has to date attempted to sell larger blocks of stock to institutional buyers. Then, each stockbroker within a firm has offered the stock to clients, larger clients getting a priority on the amount available to them. After this “IPO” the trading of stock is done in the “secondary” market place, and the market will dictate the price at any given time.  The corporations normally have a public relations firm do ongoing press releases.