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By Doreen Martel

Stock market investing and understanding shares

Stock market traders commonly use phrases like “I own 500 shares” of XYZ Corporation. However, for those who don’t trade the market, the term shares may hold little meaning. Simply put, if someone owns shares in a company, they own a piece of that company. Shares entitle the holder to say they have an ownership portion of a company. Most companies have two share classes: preferred shares and common shares. Preferred shareholders are often given some benefits not afforded to common shareholders; specifically, if the company is liquidated for any reason, the preferred shareholders are paid before the common shareholders.

Can anyone invest in shares?

Anyone who is interested in saving money for the future may consider investing their money in shares. The shares may be purchased in a specific company, such as IBM, or the investor may elect to purchase shares in a mutual fund. A mutual fund generally offers a mix of shares in different companies, which allows an investor to have a diversified portfolio which can mean less risk for the investor. Not every investment is right for every person; every investor must understand the risks they are taking and pick investments that are appropriate for their needs.

Why would anyone invest in shares?

One of the most common reasons people invest in the stock market is to grow their retirement account. While there are millions of people who invest in the stock market, individuals who hold retirement accounts, particularly through their employer, potentially represent the largest segment of investors.

What risks are involved in buying shares?

Many investors see informational advertising for shares and mutual funds online or in magazines. Nearly always they see the disclaimerpast performance is not necessarily indicative of future results.” Simply put, this is because investments are risky, and investment advisors, companies marketing stocks, and companies who are issuing stocks cannot guarantee that an investor will make money. Investors are putting their funds at risk anytime they purchase shares. Some investors will make small amounts of money, some will make significant amounts of money and a few will lose their entire investment.

How does someone lose their entire investment?

When an investor owns common shares of a company and the company files for bankruptcy, they may lose their entire investment. One stark example of this is for those who owned Kmart stock prior to 2003. Kmart stock was traded on the New York Stock Exchange (NYSE) under the stock symbol KM. In 2002, the company had some management issues and other problems and filed for Chapter 11 bankruptcy protection. Those investors who owned shares at the time lost all of the money they had invested when the stock expired worthless in 2003, in spite of the fact that Sears bought Kmart.

Investing in shares can be risky but can also be financially rewarding. Any person considering investing in any company should carefully review the stock prices, understand the risks they are taking and seek competent financial advice. Investors can lose all of the money they invest if they make bad investment decisions.

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