The stock market can be confusing. Most of the time, we just start investing, knowing that it’s what we’re supposed to do to grow our money, but we rarely take the time to understand what it means to own a stock.
In this article, I’ll give you a breakdown of the stock market and why we use it as a vehicle to grow our investments. Having a better understanding of this and why you’re investing will make you a better investor in the long run.
What Is the Stock Market?
A stock market is a market system where publicly traded company shares are traded back and forth. Owning a company’s stock is like owning a small piece of the company itself. It allows people to participate in a company’s overall success (or sometimes failure) through dividends, profits, and losses.
Stocks are traded through stock exchanges. The two biggest stock exchanges are the New York Stock Exchange (NYSE) and Nasdaq (NASDAQ), founded in 1792 and 1971.
Back in the day, when you bought or sold a stock, you were issued a physical paper certificate proving your stock ownership in a company. Today, this is all done electronically.
The stock market has two sub-markets: the primary and secondary markets. The immediate need is when a company decides to go public to raise capital (cash) and issues an Initial Public Offering, or IPO.
Large investment firms will get the first crack at buying the stock, which they do through the primary market. Once most initial shares are purchased, those investment firms will re-sell stocks on the secondary market, commonly referred to as the open market or the equity market.
For example, investors buy stocks through their favorite online broker through the secondary market.
So What Does It Mean Own a Stock?
Owning stock in a company, or owning shares of a company, means you own a piece of that company. Before you start thinking you get to put on a suit and walk into the headquarters to boss everyone around; remember how much of the company you own.
Odds are it’s very little, and you have essentially no power. Sorry to break it to you.
Think about it this way. As of this writing, Apple (AAPL) has about 16 billion shares of stock outstanding and available for trade.
Say you want to invest $10,000 in Apple today. At the time of this writing, Apple’s share price was $141.54. With $10,000, not including any brokerage fees, you’d end up with approximately 70 shares of Apple stock. Congratulations, you own part of Apple.
Remember when I told you they have 16 billion outstanding shares? Take your 70 shares and divide it by 16 billion:
70 / 16 billion = 4.375 × 10^-9 percent (in other words, microscopic).
As you can see, you own a fractional amount of the company, so you won’t have much say in how they do things in terms of voting rights.
I did that so you can switch your focus on what it means to own a company’s stock. While you own a portion of the company, it’s a tiny portion. The more significant benefit is that you now have a claim on the company’s profits and assets.
For instance, some stocks pay dividends. As the company makes money, it may issue dividends—or pieces of the profit—to its shareholders. The more stock you own, the more you’ll make if and when they pay dividends.
Guess who gets the benefit if the company is acquired or bankrupt and liquidates its assets? The owners do. Now, if your company goes bankrupt, they’ll have to pay all their creditors before you get anything, so being acquired is a much more fruitful investment (obviously).
By owning a company’s stock and owning part of the company, you get to benefit from the success of that company. And if you’re a great investor, you benefit from the fear of other investors when they sell stocks in a panic.
What is Common Stock?
When you buy stock in a company, you buy what is called common stock. This stock ownership is a company’s most basic and common type of stock.
As I discussed above, when you own common stock, you own a portion of what the company owns and are entitled to its profits and assets. In addition, common stock usually carries voting rights, which means you can vote on issues affecting the company.
While owning common stock is the most basic way to invest in a company, it also comes with the most risk. If the company goes bankrupt, you may not get anything back. For this reason, many people choose to invest in other types of stocks or securities when starting (i.e., an ETF, index fund, or mutual fund).
What is Preferred Stock?
Preferred stocks are a type of stock that typically offers investors a higher dividend yield than common stock. This is because the company is more likely to make preferred stock shareholders its priority when it comes to having to pay dividends. Preferred stockholders typically have no voting rights and may not be able to sell their stocks unless they are offered first to the company.
What Are Ownership Units?
An ownership unit is another name for a share of stock. When you own a stock, you are considered an owner of that company. You are entitled to vote on important matters, like who will be the company’s CEO. You may receive dividends if the company is doing well.
Why Do Companies Want to Go Public?
Publicly owned companies are a massive part of our economy, playing a significant role in basic capitalism and our savings and retirement system. Without the ability to invest in a public company, there’d be no stock market and, thus, no central platform for us to grow our savings that lead to retirement. We’d have to take our chances on real estate and art.
“Going public” is a way for growing companies to raise money, grow even bigger, and do it much faster. By “going public,” the company is allowing others to own part, or all, of the company. In exchange, the company gets funding to grow (money).
Think about it like the show Shark Tank, only the small business people are the company, and the investors are the large institutional investment firms. They’re giving the company money in exchange for part-ownership in a company. It’s far more complex than that, but that explains why a company would want to go public—for growth.
What Causes Stock Prices (And Markets) to Fluctuate?
What’s interesting about stock prices is that their ups and downs don’t directly correlate to the company’s overall performance. If a company is doing poorly financially or bombs on its latest product, that in and of itself doesn’t cause the stock price to drop.
Remember, we’re all owners of the company. Many factors determine the price of a stock, and it’s often our reaction to those factors that cause the price to move.
For example, suppose you own stock in Apple and see their CEO indicted on multiple counts of fraud. In that case, you’re probably going to panic. While this may ultimately end in Apple’s demise, the ultimate drop in the stock price is caused by your fellow panicked owners. They all suddenly want to sell their stock.
When there are more sellers than buyers, the stock price will fall. It’s basic economics. Suppose you were selling apples at a farmers market, and 100 other people were selling identical apples as you. In that case, you couldn’t exactly put a premium price on those apples. You’d have to drop the price significantly to attract a buyer. It’s the same thing with individual stocks.
Other factors like news, natural disasters, poor financial performance, acquisitions (and the list goes on) can all impact a stock’s price. Still, it’s almost always an indirect relationship between the buyer and seller.
The same is true for prices rising. Suppose news breaks that Apple is releasing a revolutionary new computer. In that case, it might increase Apple’s profits, which is always suitable for its owners. So if all owners know this, they may want to hold on to their stock or hold out for a much higher sales price. In this case, the stock price would go up (more buyers than sellers).
Should you invest in the stock market? The short answer is yes. But you need to know what you’re doing first. The first step is to find a reliable broker. Then you need to start learning the basics of investing. Spend time reading through our investing articles archive, and you’ll become well-versed in no time at all.
Frequently Asked Questions About Stocks
Where do many investors focus their money?
Many investors focus their money on stocks. This is because stocks represent a part of a company, and when the company does well, the stock prices also go up.
What is market capitalization?
Market capitalization is the total market value of a company’s outstanding shares. It’s calculated by multiplying the price of a particular company’s stock by the number of outstanding shares. This gives you the total market value of all the company’s shares.
What are a company’s earnings?
A public company earns earnings from its operations and is reported on the income statement. They’re what’s left after deducting the cost of goods sold, operating expenses, and interest payments. Earnings can be divided into three categories: a company’s profit, cash flow, and EBITDA.
What are mutual funds?
Mutual funds are investment vehicles that allow people to invest in a group of stocks, or other securities, as a way to spread out the risk. When you buy shares of a mutual fund, you’re purchasing into a pool of money collected from many different investors. This money is then invested in various securities, which helps minimize your risk if one or two investments go bad.
What is a fund manager?
A fund manager is an individual who is responsible for the management of a mutual fund. This includes making investment decisions on what securities to buy or sell and overseeing the fund’s day-to-day operations.
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