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Economists define investments as purchasing land, labor, and capital to produce goods and services. Investors define investments as purchasing an asset such as stocks and bonds. I briefly discuss the following common terms, concepts, and theories when investing in common stock. Examples of common stock are The Home Depot, Hewlett Packard, Wal-Mart, Bank of America, and Kaiser Permanente.

Common Stock. Stock Split. Bull Position and Bear Position. The Efficient Market Hypothesis. Random Walk Theory. Reading Stock Market Transactions.

Common Stock

Common Stock represents ownership of a corporation and acquiring rights to the corporation; for instance, if you own stocks for Federated, you own part of the Federated corporation. People who own common stock can elect the board of directors who selects the corporation's management. If the corporation goes bankrupt, common stock holders receive last claim on the corporation's assets which usually is nothing because creditors are paid first.

Also, common stocks holders are entitled to the corporation's earnings paid in the form of dividends. Dividends are payments to their stockholders in cash, more stock, or property usually paid in one increment a year, two increments a year, or four increments a year. Most corporations pay dividends in four increments a year. Dividends can be taxed as personal income.

Stock Split

Corporations may split stocks when the price of their stocks rise substantially. Stock split lowers the stock price and makes the stock available to more investors.

For instance, the price of the stock before the stock split is $30. I own 300 shares. Total value of stocks I own is $9,000 ($30 price of stock multiplied by 300 shares).

The stock splits 2 for 1. The new price of the stock is $15 and I now have 600 shares. Even when the stock split, my total value of the stock did not changed which is $9,000 ($15 new price of stock multiplied by 600 shares). Stock splits increase (or can decrease) the number of stocks available while maintaining the value of the stocks.

Bull Position and Bear Position

Investors can take two positions which is the bull position or the bear position. These animal references refer to the bull statue and bear statue located outside the New York Stock Exchange. The bull position (also known as the long position) is the expectation stock prices increase. The bear position (also known as the short position) is the expectation stock prices decrease.

The Efficient Market Hypothesis

The Efficient Market Hypothesis states stock investors should not outperform the market everytime by selling stocks for huge profits. Stock investors make effective use of information regarding companies and their stocks such as dividends, economic security, new products, quarterly earnings, etc. The market is efficient such that any information regarding the companies, the stock is adjusted from the information by an increase or decrease in the price of the stock. Any information a stock investor knows can't be used as an advantage to make money. The Efficient Market Hypothesis assumes a large number of stock investors, information is widly available and free, and minimal transaction costs.

There are three forms of the Efficient Market Hypothesis:

• Weak Form. Charting any stock's past price movement is furtile. The stock market is efficient using past information can't predict future status for any stock because the prices for every stock reflects the companies' current financial situation.
• Semi-Strong Form. Current stock price reflects public information of the company's stock. Hence, it's impossible for a stock investor to make money. The public information about the company is already reflected in the price of the stock.
• Strong Form. Current stock price reflects confidential information of the company's stock because insiders leaked secret company information to buyers and sellers. It's impossible for a stock investor to make money since the confidential information is already reflected in the price of the stock.

Random Walk Theory

Random Walk means past actions can't predict the future. As applied to the stock market, changes in the stock prices in the short-run can't predict the stock prices in the long run. Amateur stock investors can randomly choose stocks and make money just like professional stock investors.

Reading Stock Market Transactions

• n: Indicates a new stock listed in the stock exchange in the last 52 weeks.
• x: Indicates the stock trading ex dividend day. When the company's directors declare a dividend, the date of record is established which determines who receive the dividend. If the stock is purchased after the date of record, the purchaser does not receive the dividend and the stock is traded ex dividend. The ex dividend day is two trading days before the date of record. Whoever owns stock on ex dividend date does not receive dividend payments.
• s: Indicates the stock split within last 52 weeks.
• 52 week Hi: Highest price of the stock in the last 52 weeks. A triangle pointed up left indicates a new 52 week Hi.
• 52 week Lo: Lowest price of the stock in the last 52 weeks. A triangle pointed down left indicates a new 52 week Low.
• Stock: Name of the company.
• Dividend: The rate stock holders receive each year for each stock owned. The dividend can be paid once in full, twice in half, or four times in quarters per year.
• Yield %: The amount of the dividend divided by the price of the stock.
• P/E: Price/Earnings ratio is the ratio of the stock price to the company's per-share earnings. The Price/Earnings ratio shows how much the market pays each dollar of earnings. For example, a Price/Earnings ratio of 20 means the stock is selling 20 times the compay's earnings and the market believes $1 of the company's earnings is worth $20.
• Vol 100s: Number of stock traded multiplied by 100. For example, a stock with Vol 100s 245 means 24,500 shares of stock was traded.
• Hi: Highest price in trading for the day.
• Lo: Lowest price in trading for the day.
• Close: Last price in trading for the day.
• Net Change: Last price reached in trading minus last price reached the previous day in trading.

• An underlined stock indicates a large change in volume of trading for the day. A boldface stock indicates the price changed at least 5% for the day.

Date Last Updated: Saturday December 28, 2002