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Wednesday, August 4, 2010

Understanding Stocks & Stock Options

Investing is not a get-rich-quick scheme! Smart investors take a long-term view, putting money into investments regularly and keeping it invested for two, five, 10, 15, 20 or more years.

Stocks - Owning Part of a Company

Shares of stock may be acquired on an organized exchange such as the NSE or Bombay Stock Exchange, through a stock-broker, over the counter or by direct purchase in some cases.

When you buy stock, you become a part owner of the company and are known as a stockholder, or shareholder. Stockholders can make money in two ways:

A. Receiving dividend payments.

B. Selling stock that has appreciated.

A dividend is an income distribution by a corporation to its shareholders. Stock appreciation is an increase in the value of stock in the company, generally based on its ability to make money and pay a dividend. However, if the company doesn't perform as expected, the stock's value may go down.

There is no guarantee you will make money as a stockholder. In purchasing shares of stock, you take a risk on the company making a profit and paying a dividend or seeing the value of its stock go up.

Before investing in a company, learn about its past financial performance, management, products and how the stock has been valued in the past. Learn what the experts say about the company and the relationship of its financial performance and stock price. Successful investors are well informed.

Stock Options

Some companies offer employees stock options, which they can use to buy stock in the company at a fixed price.

For example, your employer, AAA Company, offers a stock-option plan, and its stock is valued at 20 a share. The stock-option price is set at 30 a share.

As part of your compensation for meeting company goals and contributing to increased profits, you receive options to purchase 100 shares.

Over time the value of the AAA Company's shares appreciates to 60 a share. You may now want to exercise your stock options and purchase the shares valued at 60 for 30.