Is Your Money Safe When Stock Prices Tumble?

Common stock is a security which represents ownership in a corporation. Holders of common stock have the right to elect board of directors and vote on corporate policy. If a corporation goes bankrupt and has to liquidate their assets; bondholders, preferred shareholders, and other creditors will have claim to the corporation’s assets before common stockholders. Common stock is riskier than other security instruments. However common stock will usually outperform bonds and preferred stock over the long term.

Preferred stock is a security that has claim over common stock with respect to corporate dividends and often to the assets of the corporation in the event a corporation has to liquid their assets. Preferred stock holders have no voting rights of the corporation.

Have you ever heard a financial guru say now is a great time to invest in the stock market if you have a long term mentality for investing. The assumption is that what comes down must go back up to its all time highs. This investment advice is a myth.

Over the last 18 months there have been several stocks that were at their all time highs and are now worth almost nothing. In fact they have lost 60% to 95% of their value in the last 18 months.

So what happens when you buy shares of stock in a corporation? The corporation uses investor’s money to pay its accounting expenses and to grow the corporation. Hopefully the corporation can make a profit and not a loss. If a corporation makes a profit they can choose to pay dividends to their shareholders. In theory the price of the stock will grow in value. Supply and demand for the corporations stock can contribute to the growth of the stock price.

How do you know what company to invest in? There are many factors that can go into the decision making. The name, company, brand or longevity of a company should not really be considered when deciding on a good investment. Find a company that is in a growing sector. Financials, real estate and construction are sectors of the economy that are not performing well. Research the company financials and find out everything you can about them. Some of the company fundamentals to look for are P/E ratio, Acc. Distribution, EPS rank, Price Rank, Group Rank, F/E Score, Estimates, Financials, 52 wk low’s and 52 week high’s. You can find company information from many sources or what I have found to be the easiest, fastest and most accurate way is to subscribe to Investools an investor education resource. There are 12 sectors of the economy and each sector has industries within them. For example the 4 industries within the Healthcare Sector are Biotechnology & Drugs, Healthcare Facilities, Major Drugs, Medical Equipment & Supplies.

Some of the companies that are struggling and have tumbled were some of the strongest and most respected companies of the American and the world. Over the last 18 months AIG has been as high as $60 and now it is at .35 cents, Citigroup high $50 and low $1.02, Wamu high $40 and low .01 cents. The American big 3 auto makers Ford, General Motors and GM are on the verge of bankruptcy.

If you are not invested in the right sector and industry your investment might not return to the levels you purchased the stock at. Maybe a better money management decision might be to cash out and take your losses.