Stock seems to be like some household term that we hear a great deal about and more so as we delve further into the information age. But what is a stock really?! A stock itself is simply a share in a company. That’s it! As simple as that sounds, Wall Street and the media have done a great job to confuse investors. To illustrate what it is we are talking about in more detail, lets go over a quick example of two individuals who own a company and how their ownership share relates to owning a stock. Imagine two individuals are trying to open up a small gym down the road. First they would need to finance the project with some money, then have to purchase/rent a building to facilitate the business, then among other things purchase equipment set up the gym and then open doors for daily operations. In this example, they both would share costs, share liabilities, and reap the benefits together 50/50 because they both have a half stake in the company. If for instance over time the business grew to a total value of 1,000,000 dollars, both partners would individually have 500,000 dollars in the company. After some time, one partner decides that they are not content with the size of the company and wants to collect more cash to reinvest into the business to grow the gym further generating larger profits. They would need to go about doing this by going through the various steps in forming a corporation and going public as an Initial Public Offering giving the general public a chance to buy into the gym by issuing shares of common stock. In this example they choose not to want to give up a significant amount of their share but decided that 10 percent would be sufficient enough to generate enough cash to further the company. As a result of this, the two partners will no longer own the company 50/50 anymore, but rather each will have 45 percent and potentially hundreds and even thousands and millions of shareholders will own the remaining 10 percent as the two had originally planned it to be. In this brief simplistic example, you can see the transfer of ownership from the original owners of the gym to the stockholders by the issuing and purchasing of stock in the company giving a more complete understanding of what it means to be an owner in a company. You can also see why business owners offer stock options to and how it can possibly benefit the corporation.
There are two main reasons why individuals buy stock in a company. These two reasons include a capital gains appreciation one can receive from successful trading or for profit distribution in the form of a dividend. Capital gains appreciation is simply purchasing a stock for a lower price than what you sold it for on a later date. So, if you purchased 50 shares of Walmart at 50 dollars a share and sell off your shares for 75 dollars at a later date, you would have seen a 50% capital gains appreciation of 1,250 dollars leaving you with a total of 3,750 dollars in your total investment in Walmart. This would be an extremely favorable investment and one that is possible through acquiring sound advice and executing smart financial decisions. Another reason someone purchases stock in a company is to receive a periodic dividend as a result of profit distribution. Shareholders are entitled to profit distributions when companies generate a profit and opt to pay dividends. In many cases, individuals make investment decisions on stocks based on potential capital gains and dividends and weigh their options accordingly.
An underlined benefit eluded to in the gym example is by owning stock, you are now a business owner. If you own 5,000 dollars worth of Exxon Mobile, you own 5,000 dollars worth of all assets that the company owns. This means that you get excited when you see people pulling into your gas stations with their large SUVs. As a business owner, you have voting rights and a right to your share of the assets in the company if for whatever reason the company went bankrupt and they needed to sell off their valuables. Being financially tied in a company, you are interested in the decisions and steps your company is taking to experience a greater level of profitability and anticipate positive news that increase the value of your investment.