So you know what brands, companies, and banks are. Great! But what the heck is stock, and why would you want to buy stock rather than the stuff a company makes? Easy. You want to make money. Who doesn't?
And why do companies issue stock in the first place? Well, for pretty much the same reason.
OK, let's bring this down to a more personal level. Let's imagine you're back in early America, and you've got a friend named Betsy Ross. (Years from now she'll be in all the history books, but that's a ways off yet. For now, she's just your pal Betsy who spends all of her time knitting.)
Betsy comes to you asking for money to start her flag business. She needs to buy yarn, thread, needles, and a comfortable chair to knit in, and hire a sewing staff.
Now, you could lend her the money, and she would pay you back — maybe with a little interest on top. Easy enough. Or you could buy a portion of the Betsy Ross company — essentially becoming a partner in the company — and get paid back by part of the profits from sold goods.
This means that every time she sells a flag, you get a small piece of the sale. That is buyingstock.
A stock is a physical piece of paper that says you own a number of shares of the company, and that you are in partnership with that company.
And here's the thing: If you believe Betsy's company is viable and has a promising future, then you'll likely make a bigger return off your money by owning a part of the company, as opposed to getting a fixed return from lending her the money.
So you get something out of it, and so does Betsy: Maybe she couldn't get money from a bank, or maybe she didn't want to have to pay back the loan with interest.
If banks won't lend her the money or Betsy doesn't want to be weighed down with debt, then Betsy's company will need to raise money from elsewhere...i.e., you.
By extending shares, companies bring in money from stockholders in exchange for a right to a part of the profits.
But here's the trick: How do you get your money back on the stock? The company might pay quarterly dividends. Otherwise you can sell your shares either back to the company or to another investor.
A good investor is able to recover his initial investment and capitalize on the profitability of a company as long as he holds the stock.
Three Facts to Wow Your Friends at a Party
1) Scripophily is the study and collection of stocks and bonds.
2) Open outcry is the name of a method of communication between professionals on astock exchange, which involves shouting and the use of hand signals to transfer information about buy and sell orders.
3) The oldest stock exchange on record was created in Antwerp, Belgium, in 1460.
Ronald vs. The King
Let's say you had a Big Mac today, and it really hit the spot. And the lines were out the door, so you're thinking, "What the heck, I'll buy some McDonald's (MCD) stock at WeSeed."
But what does that word "stock" mean? As we said before, a stock is a little piece of ownership in a company. So if you buy stock in McDonald's, you're buying a little piece of all those Big Macs and McNuggets.
Not a big piece, but if you really like McDonald's, that won't bother you. Wouldn't it be great to stroll into McDonald's like you owned the place? Well, that's exactly what you would be doing if you owned its stock.
But let's say you also like to eat at Burger King.
Maybe the fries aren't as good, but you're partial to the burgers. Should you own a piece of Burger King instead?
Here's one way to decide: Take a stroll in one of the restaurants and act like you own the place. Which one is in better shape? Which one would you rather own: McDonald's or Burger King (BKC)?
That's what owning stock really comes down to: Which business would you rather own? Now, you could also decide to buy both of them.
That's what we call diversification, which is kind of like stopping at McDonald's for the fries and then swinging over to Burger King for a burger. But we'll get to that soon.
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