Reading financial papers or watching a finance channel can be much more confusing than it needs to be if you don’t know what a stock is. Stock is bought for the pursuit to make money, but what exactly is it and how does it make you money? We need to begin by explaining what a corporation is.
There are three types of business entities: sole proprietorship, partnership, and corporation. A corporation is run by a board of directories and is owned by many people called it’s shareholders. A corporation has to be incorporated in order to sell stock to shareholders.
Shareholders each own part of a corporation. They choose who gets on the board of directors. They don’t run the company, but it is their vote that chooses who does. These shareholders have equity in the company.
In order to become a shareholder, you must buy a share of that company. This is called a share of stock. If you buy one share of stock of Apple, you have become an Apple shareholder. When you hear ’stock’ this is actually a general term which could mean one or more shares. You can buy one share of stock, or you can buy a thousand shares of stock. It is up to you.
Corporations choose to issue stock when they need money to expand and build their business. They issue stock and the money they get from the sale of this stock is the capital they raise. If you buy stock in a company, you are purchasing an equity security because it is not money they owe you, it is equity you have in the company. If a company sells 50,000 shares of stock at $6 per share, they have raised $300,000 for their business.
How do stocks make money? They increase in value through supply and demand. If you buy one share of Company A stock for $10, you have a purchase price valued at $10. If a lot of people want to buy the stock, they will have to pay a higher price if there are fewer people willing to sell.
It is the supply and demand principle that drives up the price of any product. The more demand the higher the price and the fewer supplies, the higher the price. If the value then goes up to $13, you can sell it and make a $3 profit.
You can also make money directly from the company in the form of dividends. If you have 100 shares of a company that issues a 25 cent dividend every quarter, you will be paid $25 every quarter, or $100 a year. Not all companies issue dividends every year.
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