When you buy a company’s stock, you are essentially buying units of ownership of the company. You can only purchase stocks from companies that are publicly-traded. If you want to be a shareholder of a company, a dynamic that you must understand is how the number of shares available can affect the price of that company’s stock. Generally, the greater the number of total shares, the lower the price is going to be per share. The difference in the number of outstanding shares will have a great effect on the stock price even if firms have the same value.
To illustrate the relationship further, let’s consider two companies that are both valued at $100,000,000. Company ABC has 1,000,000 shares outstanding while Company DEF only has 100,000 shares outstanding. The stock price of ABC is $100 per share (1,000,000/1,000,000) while that of DEF is $1,000 per share.
This example shows that even if both companies are both valued at $100 million, the stock price of Company DEF is worth ten times that of Company ABC by virtue of its smaller number of shares outstanding.
The relationship between stock price and the number of shares outstanding is important because it will tell you of the stability of a particular company. Firms who are already established and have robust earnings will even reduce the number of outstanding shares so that the remaining shares will increase in value. The process which is beneficial for investors of a company is called a buyback or a share repurchase plan.
Share buyback plans basically allow the company to invest in itself. When a company conducts a share repurchase, it basically buys back the stock from investors so that the total shares outstanding are decreased and the company increases its ownership of their company. Buybacks are good news for investors because these signal that the company is on stable footing. No company would repurchase its own shares if it did not have the money to do so. They would not also conduct a buyback if they had no reason to believe that the company will be able to recoup the expenses of buying back their stock down the road.
A share repurchase may be done in either of two ways. First, the company may introduce a tender offer to shareholders where they will tender a part of or all the shares they hold in the company within a specific time period. Usually, the company will be buying the shares at a premium or higher than the stocks market price. The premium is set to lure investors to give up their shares instead of keeping them. The second way of holding a share repurchase is for firms to buy back the shares in the open market within a specified time frame.
If you are a potential investor, it’s a good idea to be on the lookout for companies that offer share buybacks to their investors. It gives you a good idea of the stability of the company.
In your journey to the stock market, you need to be accompanied by a broker. Traditionally, a broker was always a person who would be able to facilitate your trade for you. Without the broker, you will not be able to buy or sell your stock holdings. Now, a broker can also be an internet site which allows an investor to conduct the trade himself or herself with just a few clicks of the mouse.
Brokers offer investment advice, perform research on potential investments and share their knowledge on the various types of securities in the market.
There are basically three types of brokers: 1) Full-service broker, 2) Discount broker and 3) Online broker. A full-service broker, such as Morgan Stanley, offers the most extensive service among the three types of broker. Because of that, they are also the most expensive. Since they are already well-established, many investors feel a certain level of security when they entrust their investments to a full-service broker. They do all the research and pick the stocks for their clients.
Aside from the fact that hiring a full-service broker will mean less work for you, another advantage that they offer is that they get in touch with you right away if an important development occurs in any of the companies that make up your portfolio. They will also contact you if a new offering that looks promising comes up. The research reports that they give to their clients are also detailed.
Of course, all these come at a cost. You will have to pay a premium for these services. Also, young investors would most likely not be able to afford the commissions that are collected by full-service brokers. Money issues aside, these brokers are also not ideal for those who would like to be more “hands on” in their investments.
A discount broker, like Charles Schwab & Co, provides fewer services compared to full-service brokers. Some of them do not offer advice and research services. They only conduct the transactions you want done for a fee. Others give newsletters and some tips but not at the level which full-service brokers go to.
The advantage with discount brokers is that the fees are not as high and you only pay per transaction. The downside is that if you don’t have the time or patience to conduct your own research, you may just be paying a discount broker to perform your trades for you with no substantial basis for your investments.
Internet brokers, like E*Trade, are the most affordable type of brokers, especially for the young investor. They can afford to give very deep discounts because their overhead is low. For those who are just starting out in the world of stocks, an internet broker is the cheapest.
However, internet brokers are only for those who have the time to actually research their potential stocks. You must also be able to access various sources of information so you can choose the best stocks to invest in. Care must also be taken to ensure that you choose only reputable Internet brokers. Be sure to do your research first so that you only do business with legitimate ones.
Selecting a broker is no simple thing. After all, you will be working with your broker for as long as you intend to invest so it’s a good idea to choose the one that is a good fit. Here are some guidelines to keep in mind:
1. Decide if you want a full-service, discount or internet broker based on such factors as your needs, finances and types of investments. For example, if you feel that you will never have the time to research on your own and you would feel more comfortable if someone else would handle your investments for you, then a full-service broker would be a good idea. However, if you can’t afford one and would like to do your own stock research yourself, go with a discount or internet broker. Only you can make that decision based on your circumstances.
2. Ask for recommendations. Your parents, friends and colleagues can be good sources of information regarding brokers, for as long as they dabble in stocks and investments. Create a shortlist of potential brokers and conduct a research about them online so you will know things like qualifications, experience and commissions charged.
3. Conduct a phone interview. Talk to your shortlisted candidates over the phone and ask if they deal with investors like you. They might want to know more about the kinds of investments you are interested in and will tell you about their services as well. Some may not entertain young clients but don’t be discouraged. There are other firms who are willing and happy to make you their client. If you are satisfied with the phone interview, schedule an appointment to meet with the broker personally.
4. Be honest about your needs when you get to see the broker. In your face-to-face interview, honesty is important. Talk to the broker about the kinds of investments you see yourself making as well as what your financial position is and where you like to see yourself after a few years. The broker will be asking you about the amount of your investments as well so be honest about that. After all, they earn a living from commissions.
5. Be mindful about the rapport or connection that you and the broker are having during the interview. If you feel that you are not connecting with each other, it’s generally a good idea to consider the others in your list. Remember that you are entrusting the broker with your money so you want the best service. Since you are also going to be paying the broker for his or her services, you have all the more reason to demand good service.