What is a Stock?
A stock represents a share in ownership of a company. As a part owner (shareholder) of a company, you have a claim to a portion of said company’s assets and earnings. Stock is more of a general term, as in “I own stock in Facebook.” The term share, on the other hand, can be seen as the units of ownership. For example, Bob asks, “Hey, SRGO, do you own any stock?” “Why, yes,” says SRGO, “I own twenty shares of stock in Google.” But for all intents and purposes, they can be used interchangeably.
How Can You Buy/Sell (Trade) Stocks?
The main way people buy or sell stocks is through a brokerage company or service. Some examples are Fidelity, Charles Schwab, E-Trade, and Scottrade. There are even mobile trading apps such as Robinhood and Acorns
How Are Stocks Priced?
In its simplest explanation, stock prices are determined by the forces of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price of the stock may move up. If, however, more people want to sell the stock than buy it, then the price may fall. There are many factors that can influence the supply and demand of a stock, and covering the nitty-gritty of it all is beyond the scope of this post. Just know that a lot of forces are involved, and most of them are really out of your control.
How Can Investing in Stocks Make You Money?
One way that stocks can make you money is through an increase in the price of the stock. For example, if you buy a share XYZ stock at $1 and the price goes up to $2 and you were to sell, you would realize a profit of $1. Another way that a stock can make you money is through a dividend, which is a distribution of a portion of a company’s earnings. Not all stocks pay dividends, though.
How Can Investing in Stocks Lose You Money?
You can lose money if the price of your stock falls. If you don’t sell your shares, you have what’s called a paper loss. If you do sell your shares, then you will have a realized loss. Another way is if the company you own stock in goes belly-up. The company must first pay its debt lenders, such as bondholders, before paying its shareholders. More often than not, there is little to nothing left over for stockholders. Also, the shares of stocks themselves are worthless. Nobody wants to buy stock in a bankrupt company.
Needless to say, investing in stocks in individual companies can be risky. But with risk comes the potential for higher returns. Likewise, there is also a greater chance for higher losses. While individual stocks can be risky, they can have a place in a diversified investment portfolio (discussed later).
Disclaimer/Disclosure Time: I do not own any shares of Facebook or Google. Also, I have no financial relationship with the brokerage companies mentioned. Finally, I am just some random guy online. I’m not a professional financial advisor/planner. The contents of this post and blog should not be taken as financial advice.