I have a dumb question. What is a stock?
Like… what is a stock? People seem to buy them and make money.
Ha. Good question! Well… a stock is something that you can buy that gives you ownership in a specific company.
I don’t get it.
Well, let’s say you wanted to start a brewery. And you figure you need $10,000 to get started, but you only have $5,000.
Ok, ok. This seems right up my alley.
Right. So to cover that other $5,000 you need, you could split your company up into 100 little pieces. Then get 100 pieces of paper and on each one write “One Share of Grasshopper Brewery Inc.” Each of those pieces of paper is now a “share” of stock in your company.
This doesn’t seem very official, but I gave it a shot:
Um… yeah, kinda. Anyway, then you go to your friends and say, “Hey! I’m starting a badass brewery. You want in or what? You can buy 1% of my company for just 100 bucks”
Yeah, my friend would definitely go for that because they’re idiots.
So if you sell 50 of those shares of stock, you just raised $5,000 to start your brewery, and you still own 50 shares and own 50%.
Ah… ok. But why would my friends buy that?
Well, let’s say next year your company does great and makes $1,000 in profit. As the CEO, you can choose to reward your owners and return those profits to the investors. $1,000 in profit divided by 100 shares equals $10 each.
Ahh… so each year all the owners get a sweet piece of the action.
Yep! And that money you pay back to them is called a dividend. That’s one of the two reasons to own a stock. Stock owners (may) get paid dividends every month, quarter or year.
So what’s the other reason?
So.. let’s say your buddy Chumbo missed out when you sold those first 50 shares. He could go to your buddy Flippy and try to buy one.
How did you know my friend’s names?
And Flippy might say? “Well… I’m making a sweet $10/year from this share. I would only sell it for $200” and Chumbo is like “BOOM. Done. Do you take bags full of pennies?”
You’re really nailing their personalities here.
And so Flippy made out on that deal. He put up $100 in cash originally, but then was collecting $10/year in dividends and ALSO sold it for $200. All while you did all the work selling the beer!
Yeah. That’s a pretty sweet deal. Ok… so this makes me think of some other questions: