What is a Stock?
Many of you have probably heard the investment term “stock” or have even purchased stock. But what is a stock? This article will define it for you.
Buying stock, also known as equities or shares, of a company means you are buying into the company for part ownership and dividends on a portion of profits. You are what is called a shareholder.
When a company is formed, the founder(s)/owner(s) put money into the business. The amount of money each person gives to the business determines the amount of ownership that person has. If there is one owner, they have 100% ownership of the company. In this scenario, the company is known as private. If the company decides to go public, it means that the owners have decided to allow public investors to buy into their company. This is how stocks are created. The company is now traded on the stock market.
You may know someone who owns stock of the company they work for but you are not able to go buy any stock in that company. This means that the company has stock, but they are still private and have made that stock available to their employees. This is what’s called an employee-owned company. Sometimes, a public company may give each of their employees stock in the company as a benefit, but have another reserve of stocks to sell on the market.
If you purchase stock, it means that you can receive some of the distributed earnings of the company for however long you own that stock. The more stock you own, the more of the dividends you receive.
Stocks may pose higher risk because they are dependent solely on the company’s performance. If you buy stock in a company and it performs above and beyond market expectations, you get a higher return on that stock. However, it works the other way as well, if you buy stock in a company and they go bankrupt, your stock is now worth nothing.
The ups and downs in the stock market is what many investors may call volatility. Here’s a graph of how the S&P 500 index shows the stock market’s performance over the last 10 years, from 2006-2015.
This is a visual representation of how the stock market can change over time. The terms for the different ups and downs in the market are known as Bull Markets and Bear Markets. A bull market is when everything is hunky-dory in the economy. People are finding jobs and the stock-market is going up. A bear market is the opposite. The economy is not doing well, unemployment rate is going up, and the stock-market is going down. Both situations happen…and will continue to happen.
It’s important to note again, past performance is not a guarantee of future success. If we are in a bull market, it does not mean we will stay in that forever. It can also be hard to predict when and why the market will change. Also, predictions are not hard assurances. No one can truly know what will happen to the market, but educated guesses and reasoning can take place.