Investing 101: What Is A Stock?

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Throughout modern history, investing in the stock market has been one of the greatest methods of passive wealth creation we have seen. The problem is that many individuals do not utilize the stock market because they fail to understand how it really works. Individuals would rather put their money into an asset class they can understand or just sit on cash, rather than throw their hard earned money into the unknown.

Luckily for you, acquiring a solid grasp of the stock market, and learning how to properly analyze stocks, can help take the fear out of investing and put you on a path towards financial freedom today.

What is a Stock?

A stock is a type of security that represents legal ownership of a business or corporation. Corporations issue stock to raise capital (money) to fund their business expenditures. This is capitalism at its finest, when you purchase a share of a corporation’s stock, you lend your money to that corporation and allow it the capital it needs to innovate, grow, research, and develop new products. Many of these products improve our quality of life, such as the iPhone, Netflix, and Google.

We tend to take for granted the fact that a many of these products are available to us, however innovation is a direct result of our well-functioning capital markets.

How to Make Money in Stocks

We understand that the stock market is good for the economy and great for innovation, however how does purchasing stocks actually benefit us?

When we purchase a share of a company’s stock, we are purchasing a share of ownership of the company. As a shareholder we are then entitled to a share of the company’s earnings. So let’s say we purchase 100 shares of XYZ Corporation for $100 per share. We have invested $10,000 into the company. XYZ Corp has 10 million total outstanding shares which gives it a market capitalization of $1 billion (10 million total shares X $100 per share = $1 billion market cap.). XYZ takes your money and the money of other shareholders, and continues to invest it towards innovation and future growth channels.

Over time XYZ’s efforts pay off and the company’s revenue and earnings begin to show some serious growth. As news breaks that XYZ’s revenue is accelerating, more and more people want to get their hands on shares of XYZ, so they bid more money for the shares. As a result of the increased demand for shares of XYZ, the stock price rises and continues to rise until the number of buyers and sellers even out. The price eventually settles at $200 per share. Since we own 100 shares of XYZ, and the share price has doubled, our 100 shares are now worth $20,000. We can sell and realize this gain at any time.

Investing takes time and patience like everything else in life. Expecting instant results is not realistic, but once you learn what qualities to look for in a winning stock, you will begin to reap the rewards of the stock market. 

Continue reading our next blog post and find out how to begin investing in stocks.

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