Tuesday, October 2, 2012

What the heck is a Stock?

Let’s say you have an amazing idea and you decide to start a company. Initially maybe you get some help from family members or friends to start things off. However, as your successful company grows, you begin to require additional funds. When this happens you can do one of two things:
  1. Borrow money by either taking out a loan from a bank or issuing bonds to the public. If you go this route; you will be required to pay interest payments along the way. This is what we call debt financing.
  1. You can issue STOCKs to the public. One of the main benefits of issuing stock is that won’t have to pay interest along the way and you wont be responsible for paying anyone back (aside from the appreciation of the stock). All your shareholders* will get in return for buying your stock is the hope that your stock will eventually be worth more than what they initially paid and that they will make a profit. And this is why a lot of companies issue stock.(*Shareholders: people that purchase you stock).
Think about a major company for example—Starbucks (SBUX). The company issued stocks for the very first time in June of 1992 (this is called IPO—Initial Public Offering). When the stock first issued, the price was $17 per share. Now, those who did their research and really believed in this company bought shares with the hopes that it would in fact be successful. By the end of that very same day in which the stock was first issued; the price appreciated to $21.50 p/s. Today is January 9th, 2015 and the price is hovering around $80 per share! Hence, whomever invested when this stock was first issued or has picked up the stock along the way at any price lower than $79 has made a profit.
The other side of the coin: Now, this could have gone either way. Let’s say starbucks didn’t turn out to be as successful as many people believed and let’s say you invested $100 in the stock when it was first issued but the company went bankrupt a year later.  As the stockholder, you would loose the $100 you invested but nothing more. No one can go after your assets. The limit of your liability will be up to the amount you invested, nothing more, nothing less. Bottom line is this: If a company is successful the shareholder rejoices in that success and if its not, then your only risk is loosing up to the money you invested in a worst case scenario.
On a personal level, I believe stocks are great investments as long as you do your research and take your time to understand what you are doing and watch where you put your money. Stay tuned for my upcoming post regarding the countless benefits of investing in the stock market in comparison to other forms of investing or a regular savings account.
Stocks might sound scary or risky but they are far from it! During the course of this blog I will show you by example exactly what I mean. Just a quick example— the average rate of return on my current portfolio is 43.97% with my top stock at 92%; this varies slightly (up or down) depending on how this market is doing. So, basically, this is like putting money in a “bank” (in this case my stocks) and earning that much interest! Now, tell me where you can get that kind of return without doing anything aside from holding quality stocks?! EDUCATE YOURSELF. The sky is the limit.
Stay tuned for the next post of Investing 101!
TELL ME: What is one pressing question you have about the information explained above? let me know!