A stock is simply a piece of a company. When a company feels that they are (or soon will be) profitable enough to pique the interest of investors, they “go public.” This means that they split up their company into shares and try to sell them to the public, thus offering investors a piece of the company.
When one owns shares of stock from a company, this person is part owner, even if they own only 1/5000 th of the company. They will be invited to attend the annual meeting, will receive an annual report outlining the last year of the company and its progress and financials, and can vote on company decisions.
The price of the stock is the value of a company divided into the number of shares that they offer. So, say you have a sheep shearing company valued at $500,000 (let’s just dream for a minute, shall we?) and you decided to go public (this is called an “IPO,” or “Initial Public Offering”). You split the company into 10,000 shares, each share worth $50. An investor hears about your fabulous, never seen before, sheep shearing technique and decides to invest. The investor chooses to invest $500 into your company thereby buying 10 shares of stock.
Two years later – after being named the Time Magazine “Person of the Year” – your company is having its best year ever and is now valued at $1,000,000. The investor decides to sell all stocks at the current price. Since it is now valued at $1,000,000 and still has 10,000 shares, the current price is $100/share. The investor sells all at $100 each and now has $1000. The initial investment has been doubled.
And herein lies the trickiness of buying stocks. It is also possible that your amazingly fast sheep shearing invention causes the wool to be toxic (sorry to pop your bubble). Two years later your company is now valued at only $50,000, with each share worth $5. The investor’s stock is now worth $50, losing $450 once it is sold.
So, you’re up for the challenge and are interested in buying stock. You’ve done all your research on the viability of companies you feel would be a wise investment – you’ve checked out their history, looked at their financials and forecast, and spoke to your neighbor who is an investment specialist. Since it would be difficult and unmanageable for you to call the companies directly and purchase your stock, you use the NYSE (New York Stock Exchange). It is like a supermarket for stocks (stock market, get it?). Rather than going to this company and that company, then selling the next day and having to go back, and whoa—wait! this other company looks terrific… investors can use one big place, always getting the newest figures on the worth of approximately 2,800 companies. Millions of stocks are traded per day.
Another component worth researching is the dividends that the company pays. If a company has a fabulous year and earns $600,000, and has 100,000 shares of stock, they can chose to either invest that $600,000 back into the company, or send out checks to each of their shareholders totaling $6, or do both, splitting up the earnings. Earnings given to the investors (based on the percentage that the investors own) are called dividends. I know, not such big money, but if you get that from a bunch of companies you’ve invested in, it could buy yourself a fancy bottle of champagne and celebrate a great year for you investment-wise. Plus, you now have stock that is worth more than you originally paid.
The stock market is a tricky investment option that can make people a lot of money, lose a lot, or make just enough for the family vacation every 5 years. Many people continue to invest that money, moving onto bigger investments. Whatever you decide to do, do your research. There are a lot of sites on the web that offer free tools for investigating your investment options. Be smart, enjoy the game, and good luck!
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