Arguably the most common thing people think of when the word “investing” comes into their minds is stock.
So What is Stock?
Stock is like your own little piece of a company. You buy stock in units called shares. When you buy a share, you give money to the company which can then use it to finance new products or services. When companies sell stock for the first time, it’s called “going public”. This event is a called an IPO or Initial Public Offering. Companies typically only do this once they reach a certain size.
Two Different Types
There are 2 major types of stock: common and preferred.
Common stock allows the shareholder to vote at company meetings, meaning they get a say in how the corporation is run. Common stock holders may also receive payments called dividends. (More on these later)
Preferred stock also allows shareholders to receive dividends, but they do not receive voting rights. The advantage of preferred stock is that they have priority in the event a company goes bankrupt. Common stock holders won’t receive dividends or other payments until after all the preferred stock holders have.
What’s So Great About Stock?
Stock often has one of the best returns of any investment. It’s one of the best places to invest money over long periods of time. Besides the financial benefits, stock allows you to choose which companies to support. You might purchase stock in a company that makes solar panels, but not in one that sells oil, if you believe strongly in green technology.
Where is It Bought and Sold?
Stock wouldn’t make much sense if it was hard to purchase. To solve this problem, something called a stock exchange was created. These organizations bring buyers and sellers together, somewhat like eBay, to create a marketplace. The largest one in the world is called the New York Stock Exchange, commonly abbreviated to NYSE. Others exist such as the NASDAQ, London Stock Exchange, Tokyo Stock Exchange, and many more.
How Do I Buy and Sell Stock?
Although stock is traded in places like New York, (On Wall Street to be specific.) that doesn’t mean you actually have to travel to buy a few shares. That would be really inconvenient, especially back in the day before cars and airplanes.
Instead, stock can be bought and sold through a broker. A broker is a person or company that represents you on the exchange floor. These days, your broker is often just a computer who buys and sells as you click.
Popular Brokers:
How Does Stock Make Me Money?
Stock can make you money in the simple form of buying and selling shares. For example, you could buy a share of Apple for $100 and then sell it at a later date when the price goes up, for say $110. Boom, you just made ten dollars!
Note: This is a vastly simplified explanation of what buying and selling shares is like. Constantly buying and selling shares is a tricky business, one best left to the pros. And even they can lose money!
Dividends- when a company makes a profit, they have the option of putting the money back into the business or making payments to shareholders called dividends. A business might say that they’ll pay a dividend of 25 cents per share. If you owned 100 shares, you’d receive $25.00.
These payments are usually made 4 times a year, once every quarter.
What’s Not So Great About Stock
Stock can be very risky. There’s absolutely no guarantee that you’ll make money. There’s actually a chance you’ll lose everything. Stock is something you buy and hold onto for a long time. Over the long term (10 years or more), the stock market usually returns 8%-10%, but over the short term, the return can be much much less.
Overall
Stock is a vital piece of almost any investor’s portfolio (all of the different investments one holds). This is even more true for young people, since we have the most time to gain from good years and plenty of time to make back what we lose in the bad years.
