Martha Myron starts a series on investing basics.

W hat is a stock? "Own your own piece of the Rock,'' states Joanne McPhee, marketing director of the Bermuda Stock Exchange, when promoting Bermudians owning stock in Bermudian companies. She is right! Purchasing shares of stock, no matter how few, gives you a piece of that company.

Ownership of common stock gives you certain rights, among them; the right to receive dividends if the company pays them and the right to vote on certain of the company's matters, such as the kinds of people who sit on the company's Board of Directors representing your interests.

Institutional money managers who buy very large blocks of stock for their clients (such as the California Pension Fund) know this and can influence some company policies.

In the news lately, financial money managers have protested the appointment of some directors to the Board of Walt Disney, feeling that these people had conflicts of interests and could not fairly represent the real company owners -- the stockholders. Your biggest right is the right to sell your stock for any reason.

How does the company's stock actually reach the market? Companies start out by issuing shares of stock during an initial public offering (IPO). The company's decision to sell to the public ownership shares (previously kept in the family that started the business) raises an enormous amount of money. The company may use the money to expand their markets globally, for instance. Normally, going public is handled by huge Wall Street investment banking firms who take on the job of selling these shares.

Of course, these firms do not do this kind of business out of the goodness of their heart. They stand to make a great deal of money from this process, known as underwriting. Tiny Bermuda has had its share of IPOs. Our own ACE Ltd went public less than ten years ago, underwritten by First Bermuda Securities and other firms here in Bermuda. ACE has become a world powerhouse in the insurance industry and recently purchased CIGNA, a company many times its size. XL Capital, TerraNova, PartnerRe, to name a few more, also went public here, and today they are listed on the New York Stock Exchange, the biggest stock exchange in the world. This is a phenomenal accomplishment! Buying and selling stock during an IPO can generate enormous profits (and terrible losses). Any company stocks associated with Internet offerings tend to create mass hysteria as investors attempt to get in on the ground floor at the opening bell and then sell the stock as it rises very quickly in price (in some cases many times its original value within minutes). Purchasing fever was so bad when Yahoo went public that the cost of one share rose hundreds and hundreds of percents in its first day. Nevertheless, IPO's are still much sought after even though with many volatile (another word for hot) IPO's; the risk is that after an astronomical climb in the first day or so, the price will sink like a meteor after that, never to return to the value you invested.

Yahoo's stock eventually stabilised, but not before many investors were initially scared off. Not all small private companies are successful in taking the huge step of becoming a publicly owned company and not every IPO becomes a terrific stock to own. However, many, many huge companies, such as General Electric, Exxon, IBM had lowly beginnings many years ago with an IPO, which virtually guaranteed their future success.

What happens to the stock after the IPO? Once the company sells the stock at the IPO, the company no longer owns it.

Investors buy and sell shares of the stock on a stock exchange, also known as a secondary market. Just as in any other retail market, the law of supply and demand determines the price or value in the stock market. If the company is seen as a great company (and its mandatory financial reports seem to say the same thing) the value of the stock may rise. But in fact, market value of a stock rises and falls on rumour more often than not. Every publicly traded investment is subject to market forces beyond its control, and in this day and age, value can change on a second to second basis.

Because the return on a stock investment is not guaranteed, you will always see statements such as this on any information about the stocks (or other publicly traded investments): Past performance does not guarantee future results. Thus, taking a risk in investing can be defined as, the greater the risk assumed by the investor, the greater the potential for reward. Investors need to assess carefully how much risk they are willing to accept to achieve these greater returns.

Why would anyone want to own stocks (or invest in stock markets) instead of keeping their money in fixed deposits, where it is safer? a.) Because you need to counter the effects of inflation on the savings you have now.

b.) Also, you may directly /indirectly work for the company and have great faith in their products or services, perhaps ACE.

(c.) You may have used or needed a product, such as NOKIA (d.) Your chances (note I said chances) over the long-term investing in the market will generally bring you a rate of return greater than fixed deposits.

(e.) Many, many Americans and Bermudians have not saved enough money for long-term emergencies or disability; to finance private school and college; or to set aside a nest egg for old age lifestyle `down the road'. They may be forced to accept additional risk in the stock market in exchange for a greater return on their investments.

(f.) And let's face it; investors buy and sell stocks for the sheer thrill of profits and the feeling they are beating the market. Be aware that no one, but no one has ever beaten the market consistently over time.

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