What is a Stock?
Stocks, bonds, Wall Street, investing, stock brokers, mutual funds, commodities, futures, options, and hedge funds; words we’ve all heard on the nightly news, TV shows, movies, and radio talk shows. Do you really understand what they all mean, not just what popular culture says they are? If not, you are in the majority of Americans. Most people have never been taught much, if anything about them, and are content to grab bits and pieces of info from the news and political pundits, or maybe they just watched the movie “Wall Street.”
But that’s not you; you are here trying to learn something, to expand your understanding of all things relating to Personal Finance. Today I’ll do my best to explain a bit about Stocks.
A stock is a share of ownership in a corporation. The owner of a share of stock is a part owner of a company. Yes, you can own (part of) Home Depot! If a company has 100,000 shares of stock, each share represents 1/100,000 ownership of that company. Most major corporations that are household names have many more than 100,000 shares; Home Depot has about 1.38 Billion!
Because the stock represents ownership of a company, its value is based on the value of the company (I won’t go into stock valuation techniques here, it’s complicated enough to take a semester long college course to teach). As the market values the company more or less (usually due to the company’s performance), the value of the stock increases or decreases, respectively.
One way stock investors earn money is by the rise of the value of the stock (it’s ‘return’). Another way is through dividends. When a company makes a profit and decides to share it with it’s owners (stock owners), it pays out dividends. The amount an investor receives is based on the number of shares he or she owns.
That is basically what a stock is, pretty simple, right? If you want to know a basic history of the stocks and the stock market, and what a stock market is, this short article on Investopedia.com is written without a lot of industry jargon.
Please let me know what you think of this post: was it too long, too short, too basic, too in-depth, etc. Also, if you have any questions, post them below and I’ll respond with the answer!