Taking Stock

• What are Stocks?
• So, You Want to Start Investing?
• Methods of Investing
• Investigate the Market
• Credit Card Smartz
• What is the Dow?
• Investing and Saving - what's the difference?
• What are Bonds?

What are stocks? 

Great question! You hear about stocks all of the time on the news, but what exactly is a stock?  Well, basically stock is the ownership interest in a company.  When a company needs to raise money, one way it does so is by offering an ownership stake in the company to others in return for an investment in the company.   Usually this occurs by the company, lets call it XYZ Inc. decides that it needs more money to continue to grow.  It decides that it will let the public invest in XYZ Inc.

What might then happen would be an IPO, an Initial Public Offering.  XYZ Inc. might offer to sell the public 50% of the company for $10,000,000.  XYZ would do this by offering to the public for sale 1,000,000 share of itself for $10 a share.  Once the shares have been sold by XYZ, the shares then may be sold on one of the stock markets by whoever bought them from the company.

If there are more people who want to by XYZ shares than were able to get their hands on them, the new owners may well be able to sell their shares for more than the $10 they paid.  If there is little demand for the shares of XYZ at $10, then the new owners might sell their shares for less than they paid, or they may decide to keep them.

Dividends

So you know that stocks help companies make extra money, but why would a person want to buy stock? For the same reason: money! Some companies, usually older ones, pay dividends. This is an amount the company has decided to pay to its shareholders for owning its stock. The only catch is that dividends are not a requirement, and companies can stop paying them whenever they want. 

An example of this is Coca-Cola, or Coke. Coke currently pays its shareholders $.60 a share per year for holding Coke stock. If the stock is selling around $64 a share, this 60 cents represents about a 1% dividend. 60 cents may not sound like much, but if you own 10,000 shares you earn $6,000 a year. Don't confuse dividends with profits, though. Most companies will pay dividends even when they're not profitable, but over time they may decide to reduce or cut their dividends depending on their profit.

Many companies don't even pay dividends, because they need to keep all of their money in their business. Dell Computer, for instance, pours all of its money back into making itself a better company. This doesn't mean that investing in such companies isn't a good idea. If you had purchased $1,000 of Dell stock in 1990, it would be worth over half a million dollars today. Not too shabby!

Basically, buying stock is buying a piece of a company in order to make money for both the investor and the company. You are looking at that company, making a judgment as to how well it will perform, then risking your money accordingly. If the company or the market doesn't perform the way you expect, the value of your stock might fall. Investing has the potential to make you a lot of money, it also has a good deal of risk, which means you could lose money.