Back to the basics today! If you’re new to investing, the concept of “stock” can seem really intimidating or abstract. But at its core it’s actually pretty simple. It’s just a system we use to keep track of who owns a company.
Let’s say back in the olden days YOU started a company with a friend. Then another friend wanted to invest and buy some of the company. Then maybe he want to sell part of his ownership to another friend. Suddenly you have a bit of a tracking problem on your hands to figure out who owns what. So we devised this concept of shares of stock. You could print out 100 fancy stock certificates, then pass them out to the owners. For every 1 share you own, that represents 1% of the company. That made it easier to identify who the owners were!
Now, of course, this is all done with computers. You can go to a website (like Vanguard, Fidelity, Schwab, E*Trade, Robinhood, etc) and buy a share of stock. Then it appears inside of your account!
Companies can have any number of shares. And they’re even allowed to create more (although that can make their current owners unhappy as it may dilute the value). So just owning a share of stock (or the price of that stock) doesn’t tell you how much of that company you own without some more info (like the total number of shares outstanding).
Owning stock is a great way to invest because shares of a company generally go UP in value as time goes on and others are willing to pay more for the shares. Plus as long as you hold the stock, you’re due a share of the company’s profits paid out as dividends. If you use those dividends to buy MORE stock, that’s called “reinvesting” and further magnifies the compound growth! 🙂
While a share of stock is the “core unit” of investing in companies, I prefer buying INDEX FUNDS which are a collection of hundreds or thousands of stocks in one convenient package!
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.