What the f*** is a stock?
Have you ever heard someone say they invest in stocks, but you have absolutely no idea what that is or where they got one? I get you, a year ago, I had the same questions. And it seems like when you google it, the results are full of difficult investing-lingo that confuses you even more.
Don’t worry, I got you. Here are the basics of what a stock is — without the tech jargon.
A stock is essentially a small share of a company.
For example, if you buy a single stock of the company Facebook (which at the time of writing is about $276 USD), you actually own a small portion of Facebook!
Pretty cool, right? But what does this actually mean for you? Let’s break it down a bit.
Imagine a company is a big pizza. Investing in a stock is like having a very thin slice of the pizza, the more slices you have, the more pizza you own. And who doesn’t love having more pizza? But why should you even get yourself a slice of pizza?
What are the perks of buying a stock?
Well, one of the primary benefits of buying a stock is the chance to grow your money over time — don’t think of it as a get-rich-quick scheme! Buying a stock entitles you to a small percent of the company’s revenue (income). This means that if the company has a great year of sales and rises in value, your stock makes money that goes into your pocket.
Another income stream is dividends. This basically means that if the company makes extra money, they will give it to their shareholders (another word for stockholders) every quarter as a reward for your support to the company. AKA, free money!
Compound interest is another way you can benefit from being a stockholder. Compounding is a beautiful thing that happens over a long span of time of you holding that stock. It’s basically earning interest on your interest.
For example:
Sophie invested $100 in the stock market which earned 10% in its first year. At the end of the year, she would have $110 because she made $10 in interest.
In the second year, the same thing happened and Sophie’s investment gained 10%, but she wouldn’t just make $10 like last time. Due to compounding, she earned interest on $110. And 10% of that is $11 so at the end of the second year, she would have $121. That’s how compound interest works.
You can imagine the difference that would make if you let you kept your money in the stock market and let it compound for 40 years. Compounding interest is a marvelous tool that when wielded correctly, can be an investor's best ally.
Are you still with me?
So, how the hell do you buy one?
You need to find a website where you can set up an investment account. This should be relatively simple, as there are many websites you could sign up to in your country to buy stocks along with other assets. Some popular ones are:
Robinhood (US)
eToro (Europe, US, Australia)
Interactive Brokers (Australia, US, Europe)
IG (Australia, Europe)
Self Wealth (Australia)
After you’ve created and verified an account on one of these websites, it all gets quite simple from there. Each website has its own verification and regulations in depositing money into the account.
Another option is that you could simply hire a stockbroker to invest on your behalf, but of course, they will charge a fee or a commission for each transaction.
Side note: Some accounts need a minimum investment amount, so make sure to avoid that if you’re a beginner and just want to test the waters.
What’s the point?
The main reason investors buy stocks is that they believe in the company. They believe that this company is going places, and it’s going to be very successful and make a lot of money in the future so that eventually, they can sell their stocks for higher than what they originally bought it for. This is called Return on Investment (ROI).
Let’s do a fake scenario:
Sophie bought five stocks from The Best Pizza Company in 2012 for $15 each.
The Best Pizza Company has since become super popular with the general public. They’ve opened some chain stores in America and have raked in a lot of high sales over the years.
So now, in 2020, the stock prices have gone up to $300 each! Sophie is now cracking open a bottle of celebratory champagne because that means that she can sell her stocks for much more than what she originally bought them for!
So to recap, in 2012 Sophie paid $75 for five stocks, now in 2020 she’ll sell each stock for $300 EACH and make a whopping ROI of $1425!
Keep in mind that this will actually be a lot more than $1425 because of compound interest and dividends.
Investors rule of thumb:
One last thing, the most important rule to remember is that you should never invest more than you can afford. This won’t make you rich overnight, stocks are a long-term investment so be mindful of that if you’re thinking of entering the stock market.
I hope you learned something new! Share this post if you think this might benefit someone else!
Disclaimer: The information contained in this article is for general purposes of information only and is not investment advice in any form.