Personal finance Term Paper Example | Topics and Well Written Essays - 2000 words

Personal finance - Term Paper Example Most money market securities provide interest income. Even if one’s liquidity needs are covered, one may invest in these securities to maintain a low level of risk. Yet, he can also consider some alternative securities that typically provide a higher rate of return but are more risky. Stocks Stocks are certificates representing partial ownership of a firm. Stock investors become shareholders of the firm. Firms issue stocks to obtain funds to expand their business operations. Investors invest in stock when they believe that they may earn a higher return than alternative investments offer. Primary and Secondary Stock Markets Stocks can be traded in a primary or a secondary market: The primary market is a market in which newly issued securities are traded. Firms can raise funds by issuing new stock in the primary market. The first offering of a firm’s stock to the public is referred to as an ‘initial public offering’ (IPO). A secondary market facilitates the t rading of existing securities by enabling investors to sell their shares at any time. These shares are purchased by other investors who wish to invest in that stock. Thus, even if a firm is not issuing new shares of stock, investors can easily obtain shares of that firm’s stock by purchasing them in the secondary market. On a typical day, more than a million shares are traded in the secondary market. The price of the stock changes each day in response to changes in supply and demand. Types of Stock Investors Stock investors can be classified as institutional investors or individual investors: Institutional investors These are professionals employed by a financial institution who are responsible for managing money on behalf of the clients they serve. They attempt to select stocks or other securities that will provide a reasonable return on investment. The employees of financial institutions who make investment decisions are referred to as ‘portfolio managers’ beca use they manage a portfolio of securities (including stocks). More than half of all trading in financial markets is attributable to institutional investors. Individual investors commonly invest a portion of the money earned from their jobs. Like institutional investors, they invest in stocks to earn a reasonable return on their investment. In this way their money can grow by the time they wish to use it to make purchases. The number of individual investors has increased substantially in the last 20 years. Many individual investors hold their stocks for periods beyond one year. In contrast, some individual investors called ‘day traders’ buy stocks and then sell them on the same day. They hope to capitalize on very short-term movements in security prices. In many cases, their investments last for only a few minutes. Many day traders conduct their investing as a career, relying on their returns from investing as their main source of income. This type of investing is very r isky because the stock prices of even the best-managed firms periodically decline. Day trading is not recommended for most investors. Return from Investing in Stock Stocks can offer a return on investment through dividends and stock price appreciation. Some firms distribute quarterly income to their shareholders in the form of dividends rather than reinvest the earnings in the firm’