Penny Stock Trading

Financial markets provide their participants with the most
favorable conditions for purchase/sale of financial
instruments they have inside.

Their major functions are:
guaranteeing liquidity, forming assets prices within
establishing proposition and demand and decreasing of
operational expenses, incurred by the participants of the
market.

Financial market comprises variety of instruments, hence its
functioning totally depends on instruments held. Usually it
can be classified according to the type of financial
instruments and according to the terms of instruments’ paying-
off.

From the point of different types of instruments held the
market can be divided into the one of promissory notes and the
one of securities (stock market). The first one contains
promissory instruments with the right for its owners to get
some fixed amount of money in future and is called the market
of promissory notes, while the latter binds the issuer to pay
a certain amount of money according to the return received
after paying-off all the promissory notes and is called stock
market. There are also types of securities referring to both
categories as, e.g., preference shares and converted bonds.
They are also called the instruments with fixed return.

Another classification is due to paying-off terms of
instruments. These are: market of assets with high liquidity
(money market) and market of capital. The first one refers to
the market of short-term promissory notes with assets age up
to 12 months. The second one refers to the market of long-term
promissory notes with instruments age surpasses 12 months.
This classification can be referred to the bond market only as
its instruments have fixed expiry date, while the stock
market’s not.

Now we are turning to the stock market.

As it was mentioned before, ordinary shares’ purchasers
typically invest their funds into the company-issuer and
become its owners. Their weight in the process of making
decisions in the company depends on the number of shares he/
she possesses. Due to the financial experience of the company,
its part in the market and future potential shares can be
divided into several groups.

1. Blue Chips

Shares of large companies with a long record of profit growth,
annual return over $4 billion, large capitalization and
constancy in paying-off dividends are referred to as blue
chips.

2. Growth Stocks

Shares of such company grow faster; its managers typically
pursue the policy of reinvestment of revenue into further
development and modernization of the company. These companies
rarely pay dividends and in case they do the dividends are
minimal as compared with other companies.

3. Income Stocks

Income stocks are the stocks of companies with high and stable
earnings that pay high dividends to the shareholders. The
shares of such companies usually use mutual funds in the plans
for middle-aged and elderly people.

4. Defensive Stocks

These are the stocks whose prices stay stable when the market
declines, do well during recessions and are able to minimize
risks. They perform perfect when the market turns sour and are
in requisition during economic boom.

These categories are widely spread in mutual funds, thus for
better understanding investment process it is useful to keep
in mind this division.

Shares can be issued both within the country and abroad. In
case a company wants to issue its shares abroad it can use
American Depositary Receipts (ADRs). ADRs are usually issued
by the American banks and point at shareholders’ right to
possess the shares of a foreign company under the asset
management of a bank. Each ADR signals of one or more shares
possession.

When operating with shares, aside of purchase/sale ratio
profits, you can also quarterly receive dividends. They depend
on: type of share, financial state of the company, shares
category etc.

Ordinary shares do not guarantee paying-off dividends.
Dividends of a company depend on its profitability and spare
cash. Dividends differ from each other as they are to be paid
in a different period of time, with the possibility of being
higher as well as lower. There are periods when companies do
not pay dividends at all, mostly when a company is in a
financial distress or in case executives decide to reinvest
income into the development of the business. While calculating
acceptable share price, dividends are the key factor.

Price of ordinary share is determined by three main factors:
annual dividends rate, dividends growth rate and discount rate.
The latter is also called a required income rate. The company
with the high risks level is expected to have high required
income rate. The higher cash flow the higher share prices and
versus. This interdependence determines assets value. Below we
will touch upon the division of share prices estimating in
three possible cases with regard to dividends.

While purchasing shares, aside of risks and dividends analysis,
it is absolutely important to examine company carefully as for
its profit/loss accounting, balance, cash flows, distribution
of profits between its shareholders, managers’ and executives’
wages etc. Only when you are sure of all the ins and outs of a
company, you can easily buy or sell shares. If you are not
confident of the information, it is more advisable not to hold
shares for a long time (especially before financial accounting
published).

Dr. John Goldfinger
www.financegaes.com (www.financegaes.com)