Juan:'I'm a little worried about investing in the stock market. It isn't doing well at the moment. Do you think I'll lose money if I buy shares at the moment?'
Peter:'You're right. The overall or average value of stocks and shares is falling at the moment. People who work in the stock market call this a bear market, when overall share prices are falling. When overall share prices are increasing, they call it a bull market.'
Juan:'So how would I know if the stock market is a bear market or bull market?'
Peter:'People who buy and sell stocks and shares look at share indices to see how well the stock market in general is performing. A share index, measures the average performance of the share prices of a group of different companies. A share index will tell if the average share price of all the companies in that group is increasing or decreasing. For example, one of the most famous share indices is called the Dow Jones 30 index. This share index measures the average combined performance of the share prices of the 30 largest public limited companies in America. In the last 6 months, the value of the Dow Jones 30 index has fallen from 13,160 to 12,101. But share indices only measure the average performance. So although the majority of companies' share prices are falling, there will be some companies whose share prices are actually increasing. So even in a bear market where average share prices are falling, if you buy shares in the right company, you can still make money.'
Juan:'What happens if I buy shares in a company and it files for bankruptcy? It doesn't have enough money to pay it's debts and to continuing operating?'
Peter:'Once a company has filed for bankruptcy, all trading (buying and selling) of its shares is stopped/suspended on the stock exchange. If the company has to close down, then you'll probably lose all the money you spent on the company's shares. But sometimes, another company will take it over, which means to buy the company. If that happens, then you'll receive some money for your shares.'
Juan:'Is a takeover the same thing as a merger?'
Peter:'They are similar. They are where two companies become one. But with a takeover, one company buys another company. With a merger, two companies combine. Normally, with a merger the two companies are of a similar size. With a takeover, it's normally a big company buying a smaller company.'
Juan:'So I need to do some research on companies before I decide which shares to buy. With the stock market performing so badly at the moment, it seems like a big risk to invest money in stocks and shares at the moment.'
Peter:'Not necessarily. As I said before, although most stock/share indices are showing that on average the share prices of companies are falling, it is only an average and some companies' share prices are actually increasing. But if you want to reduce the risk of losing money, you could buy preferred stocks or shares in a company.'
Juan:'What does preferred stocks mean?'
Peter:'There are two types of stocks/shares you can buy in a company. The first type is called a preferred stock/share. With this type, the owner of them is paid a fixed dividend (extra payment) by the company. So you're guaranteed a dividend unless the company has very bad financial problems. The second type is called a common stock, which is also called an ordinary share. With this type, the dividend you receive can change depending on the company's performance or how much of the profits that the management of a company wants to keep and not give in dividends. The amount of profit which a company keeps and doesn't give to its shareholders as a dividend, is called retained earnings.'
Juan:'Apart from buying preferred stock, are there any other ways to reduce the risk of losing your money?'
Peter:'Choose shares in companies which are stable and buy shares in many different companies. Your stock portfolio, which means what shares or stock you own, should be a mixture of shares from different companies in different sectors and industries. This will spread you risk, so you won't lose all your money if one of the companies you have shares in goes bankrupt. Also, after you have bought shares in a company, you should decide at what price you will sell or unload the shares if their price changes. This is called an exit point. So, if you bought shares in a company for $20, you can set an exit point at $15, which means you will sell your shares in the company if they reach that price. Exit points are used to minimise loss.'