Introduction to Stocks

What is a Stock?

This is a term that many of you who want to start investing have probably heard of, but don’t know what exactly it is. Stocks are the bread and butter of investing. When people think of investing, they think stocks.

By definition, a stock is a partial ownership of a company. You also may hear the term shares. These two terms are generally used interchangeably.

When you buy stock of a company, you become a partial owner of it. Because you are an owner of the company, when the company does well, you do too. When it doesn’t do well, you lose money as well. This is the basic definition of a stock.

How Do You Make Money Off Stocks?

When you buy stocks, you buy them at a certain price. For example, let’s imagine a fake company called ABC. The current price of their stock is $100 per share. Let’s say you buy 100 shares of this company. This means you pay $10,000 in total (100 shares times $100 dollars per share).

The basic way that the market works is that when a company does well, lots of people are willing to buy the stock because they expect it will go up. When more people buy it, the price increases.

Let’s now assume that company ABC releases a new, exciting product that becomes very popular, and the price of each share goes up to $200. You own 100 shares, so these shares are now worth a total of $20,000 (100 shares times $200 per share). You spent $10,000 to buy them, so you’ve gained $10,000 ($20,000 now minus $10,000 what you paid). This sounds great, as you’ve doubled your money!

The Downside

Unfortunately, there’s also a good amount of risk involved. If bad news hits a company, a lot of people will sell the stock, as they are worried it will go down. The huge selling will drive the price down.

Let’s say this new product doesn’t work, and everyone is upset about it. The price of each share goes down to $50. Now how much is your investment worth? Well, you have 100 shares, each worth $50. That means you now have $5,000. The original value of the shares was $10,000. Therefore, you’ve lost $5,000 (the investment went from $10,000 to $5,000).

Conclusion

We can see that the way to make money from stocks is to buy when the price is low and sell when it grows higher (buy low, sell high). However, this is much harder than it seems, and in most cases, it is not a good idea to try to time the market to determine when the price is low and when it is high, since it is so hard to guess right and so easy to guess wrong. In later articles, I will share strategies that will increase your chances of making a profit from your investments.