Let’s get super basic. So what is a stock?
A stock represents part ownership in a business. But it’s not just any business.
Public vs Private Company
It’s a company that decides to sell a piece of the business to the public so that you or I can buy that piece. When you buy the stock of a company, you become part owner of a public company.
Generally, companies go public when they need to raise money and decide to sell their stock to the general public.
A private company, on the other hand, doesn’t take public money and therefore, doesn’t offer its shares to the general public.
Where Does The Company Stock Trade?
The stock of the company then trades on an exchange such as the New York Stock Exchange (NYSE). An exchange is a marketplace where buyers and sellers come together and it’s their desire to buy or sell a stock that generates demand and supply which determines the stock price.
How Do You Buy Stock Of A Public Company?
If you want to be an investor in the stock of a publicly traded company, all you you have to do is open a brokerage account and then you can invest in the stock. Your brokerage buys the shares for you from the exchange when you place an order. For this service, the brokerage usually charges you a commission. There are over 4,000 publicly traded companies in the U.S.
How Do You Grade Company Performance?
Going public means a company agrees to file its performance results every quarter for the public to evaluate, also known as Form 10-Q. It also files an annual report, known as 10-K, that shows performance for the entire fiscal year. The company is required to file these performance documents with the Securities and Exchange Commission (SEC) and doing so makes them available for everyone to see.
The 10-Q shows how much the company generated in revenue and earnings over the previous quarter and it’s this performance that often moves the company stock up or down. Whether you are an investor in a company or not, you can view the quarterly performance by going to the company website or the SEC site.
When Does A Stock Price Go Up Or Down?
While the stock prices fluctuates due to the supply and demand from buyers and sellers when markets are open, the stock price generally moves when:
A wall street analyst who is evaluating a public company either upgrades or downgrades the stock
Company specific news reaches the market such as a major contract, an acquisition or CEO resignation
Quarterly results are released
How Do You Make Money As An Investor?
Well there are two primary ways: Dividends and capital appreciation.
A dividend is the money a company pays its shareholders on a regular basis (generally quarterly) out of the earnings that it generates. Mature companies usually don’t need to reinvest all their earnings into the business and instead give a portion of those earnings back to the shareholders as dividends. The dividends are generally paid in proportion to the shares you own. For example, if you own 1 share of Apple Inc (AAPL) today, you are entitled to an annual dividend of $2.52 per share, every year.
The snapshot for AAPL from finance.yahoo.com shows annual dividends:
Young companies generally don’t pay dividends and choose to reinvest their earnings back in the business instead. Even some tech behemoths like Amazon (AMZN) and Facebook (FB) choose to reinvest earnings and don’t pay dividends.
Another way you as an investor make money is when the stock you have invested in goes up in price. That generally happens when a company sells more product and generates earnings. Every quarter, a publicly traded company releases its performance results (Form 10-Q). If a company beats expectations, more buyers come in and bid the stock price up. You, as an investor, then see your stock rise in price and hence your wealth. That is capital appreciation.
For example, if you had invested in 1 share of Apple Inc (AAPL) on Jan 3, 2017 when the stock opened at $115.8, then by August 25th, when the price of the stock at the market open was $159.65, you would have seen capital appreciation of 38%.
The chart below shows the price change in AAPL stock year-to-date.
Your total wealth increase as an investor in AAPL is due to dividends + capital appreciation.
Generally dividends are paid regularly and companies rarely cut dividends except when the business is in trouble and management needs to conserve cash. However, capital appreciation depends on where you bought the stock, how the business performs over time and where the stock price trades as a result.
Please let us know which company stock you have invested in and why?
Now that you have a basic idea of stocks, please also check out: what are ETFs?