The Retirement Corporation of America

Reviewing the World of Common Stocks

HERE'S THE "60-SECOND" lesson about common stocks.

•  Nature of the investment: Buying stock makes you a partial owner of the business, sharing in all its good or bad fortune. If the business prospers, its profits will grow, and so will the price of its shares. You may earn dividends while you own the stock and may be able to sell the shares at a profit at some point in the future. However, the company may pay no dividends plus, if things go wrong, you may take a loss when, and if, you sell the shares.

•  Risk: Moderate to very high.

•  Reward: Generally high, when held for the long-term.

•  Role in your retirement savings: To provide the growth needed to help turn what you save into a lasting retirement. It's the only investment with the growth potential to outrun inflation.

You'll hear different terms used to describe common stocks and the differences among them. Here are the terms you are likely to hear most often:

•  Income stocks: These are the big, brawny giants of the business world—giant manufacturing companies, oil companies, railroads, electric companies, and telephone utilities. They tend to be financially stable, profitable in most years, and pay a hefty share of those profits out to investors in the form of dividends. You buy income stocks for their financial stability, and the dividends they pay.

•  Growth stocks: These are the leaping gazelles of the business world, fast moving, light-on-their-feet, and able to show rapid growth in most years. Growth stocks seldom pay large dividends and many of the fastest growing don't pay any dividends at all. You buy growth stocks because you hope their growth will generate hefty capital gains.

•  Large-cap versus small-cap: Cap is short for capitalization. That is the market value of the stock—the number of shares outstanding times the price of each share.

- Large-cap stocks are more likely to be big, solid enterprises—financially stable, with solid earnings, and often a generous dividend.

-- Amalgamated Auto has 100 million shares, and the stock sells for $50 a share. The capitalization is $5 billion. That makes it a large-cap stock.

- Small-cap stocks tend to be less well established, less financially secure, and seldom pay big dividends.

-- Glorious Gumdrop has 20 million shares, and the stock sells for $5 a share. The capitalization is $100 million. That makes it a small-cap stock.

•  Growth versus value: Everyone recognizes growth stocks for the investment superstars they are. Because their potential is fully acknowledged, they tend to sell for high prices. The idea behind value stocks is that some sell at what amounts to bargain prices because investors don't recognize their potential. Maybe the company has had a rough year or two, or maybe investors have turned sour on an entire industry. For whatever reason, value stocks sell at lower prices. The ideal is to spot value stocks while they are still cheap.

•  U.S. versus foreign: We don't have the only stock market in the world. There are markets from Hong Kong to Hungary, and from Italy to Israel. Each market has its share of promising stocks. In fact, some well-known U.S. brand names, including Shell Oil, Nestle, and Bayer aspirin, are actually owned by foreign companies. You don't have to limit your investing just to Wall Street. As you gain skill and confidence, you may want to become a global investor.

Summing up stocks: Unless you have common stocks in your retirement savings accounts, you won't get the growth you need to get you through a long retirement. It takes skill and knowledge to invest in common stocks. However, you are taking this course to gain that skill and knowledge.