Stocks! You've heard of them, I'm sure! But do you really know what they are?
This post gives you a quick briefing on what stocks are. Ready?
What is a stock?
A stock is an investment security that represents ownership of a company. When you buy stock, you become an owner and investor in that business. You are now what they call a shareholder.
Stocks are also known as shares. When you buy shares, you are buying pieces of the company to own.
Why should I buy stocks?
When you become an investor and owner of a business, you are entitled to your share of the business profits! When the company makes money, you make money! When it loses money, you do too. But those are risks worth taking when you are a business owner.
How do I get my share of the profits?
Two ways: dividends and retained earnings.
Dividends are the profits of the business being paid out to shareholders.
If you own 100 shares of a business, say Starbucks (SBUX), and they pay a dividend of $0.25 per share, you would be paid $25! That is $25 CASH MONEY that your business, Starbucks, is paying you.
Of course, if the business is suffering and doesn't have the cash, it may not pay those dividends. But again, that's the risk of investing in business.
Retained earnings, on the other hand, are profits that are held in the business.
When Facebook makes its profit, they don't pay any dividends (as of this posting) to pay the owners a share of the business profits. Instead, they keep the earnings and reinvest it into the business. This lets the business grow.
The way you see this growth is within the price of the stock itself.
Note that there are many other factors that affect stock price, either positive or negatively: this is just one of the positive ones.
In summary, this is a simple way of looking at stocks.
Buy a share, own a fraction of the company. It makes money, you make money. It can pay you cash profits or hold it to grow the business. Over time, the value of the business may grow, along with your wealth.
Stocks are a wonderful way to invest and grow your assets. Unfortunately, cash doesn't grow sitting in the bank. But it can grow when its actively working.
Let your money work hard for you.