What is stock?
Stock represents the partial ownership of a company.
More Stock Basics
Just like pound is the unit we use to count weight, the unit of stock is share.
Why do we need stocks?
Let’s say you own a small restaurant. Since you are the only owner, you don’t need stock or other tools to represent it.
Now suppose you want to grow the business, the restaurant will receive money from three of your friends, and each will own 10% of the restaurant, and you will retain 70% of the ownership.
In the case, your restaurant can issue 10 shares of stocks, you will own 7 shares and each of your friends will own 1 share.
A big company may issue a large number, such as millions or tens of millions, of shares of stocks. Each share represents a small percentage of the ownership of the company.
Example of Stock
Suppose McDonald’s Corp. issues 1 billion shares of stocks, and you buy 1 share , priced at $86.60 at the guide is being written, you own 1 billionth of the McDonald company. Each time a customer eats at one of the worldwide MacDonald’s restaurants, she may have contributed a little bit to your personal wealth!
Why you may want to invest in a stock – Pros
- You may make money by investing in stocks. Depending on how you invest, you may indeed make good amount of money from it.
Stocks may increase your wealth by two ways. First, some stocks issue dividends. This means the company distributes some profits to shareholders, or stock holders. Second, the price of some stocks may increase. You may make money by buying stocks at lower price, and sell them at higher price.
- When you buy a stock, you become owner of a small percentage of the company. However, you don’t need to involve in the day-to-day activities of the business. For instance, when you buy McDonald stocks, you may make money through stock price increase and dividend issuing, but you don’t need to involve in running a fast-food restaurant!
- Researches show that stock may offer better returns than many other investment products do, such as bond, savings account, CDs, and gold. Please note while this may be true for a very long period, this isn’t always true for a specific year or decade.
Why you may not want to invest in a stock – Cons
- Stock investment is risky. The price of stock may decrease or, in the worst scenario, the company may bankrupt which may wipe out the value of stock. So you may lose money by investing in stocks.
How to invest in a stock
You can invest in stocks by directly purchasing individual stocks, or through financial tools such as mutual funds.
If you choose to invest in individual stocks, you can open an online brokerage account, or contact a traditional stock broker.
When you invest in a stock mutual fund, you don’t need to pick individual stocks. A mutual fund manager will do it for you. However, the trick is: to find the right mutual fund manager!
Stock index fund is a special type of mutual funds though which the fund manager no longer tries to find best stocks. Instead, a large number of stocks in an index, such as Dow Jones or S&P 500, are purchased. Index fund typically has fees lower than those of actively managed funds.