In a previous post, I shared that the first investment one should make is in his/her education. Once you have acquired the necessary skills and knowledge to make money, the next step is to learn about the traditional investment products. In this post, I will be sharing information on one of those investment products: stocks.
Instead of me sharing a textbook definition, let’s think of it this way. What are some of your favorite companies/brands that you spend your money with? Do you like shopping on Amazon’s website? Are you more of a Walmart or Target fan? Do you like to travel? Are you a frequent flier on Southwest, Jetblue, American, or Delta? Are you a regular cruiser on Carnival, Royal Caribbean, or Norwegian? Whose brand of clothing do you like to wear? Nike, Gap, Ralph Lauren, or Guess? If you look around your home or assess your personal taste, you will identify a multitude of different companies/brands that you support.
When these companies want to raise money to either run their day to day business or invest in new technology or products, they sell portions of their company to the public. In exchange for your money, they give you some ownership of the company. The stock is the investment product that represents your ownership in these companies. You have the ability to purchase more than one share/unit of stock. The more shares/units you own, the more of an influence you will have on the company. You can make your voice heard when the company has its annual shareholder’s meeting, which is when you vote on business items which affect how the company will operate.
All stocks are not equal, and their share price reflects that. For example, the most expensive stock in the USA is Warren Buffet’s Berkshire Hathaway A stock. A single share/unit of this stock is currently $305,139 as of 2/15/2019. On the other hand, there are stocks that cost a penny, literally! Most of these penny stock companies are new companies that are just starting up. While penny stock companies can become successful, they are most times very risky. It is your responsibility to ensure that any company that you are interested in investing in, that you do your research.
So how do people make money from stocks? There are two main ways to make money from stocks: 1) share price appreciation and 2) dividend payments. Share price appreciation occurs when you buy the stock for a low price, and then sell it for a higher price. For example, say you bought a single share of Amazon’s stock for $1,607.95 (price as of 2/15/2019), and then a few weeks or months later the price goes up to $2,000 and you sold it, then you would have made an additional $392.05. Imagine that you had bought 10 Amazon shares on 2/15/2019, then when you sold them, you would have made an additional $3,920.50. When the company makes money, it may make the decision to either reinvest all the money back into the company to continue to grow it, or they may decide to share some of the profits with its shareholders. If the company decides to do the latter, then the shareholder will receive dividend payments. The company decides what the dividend per share will be, which can range from a few cents to a few dollars. Again, the more shares you own, the more impactful the dividend payment will be. When you receive dividends you have the option to get a check or you can choose to have the dividends reinvested to purchase additional shares of stock.
One final thought for this post, when possible, diversify your investments. Have you heard the saying “never place all your eggs in one basket”? This concept applies to investing in stock or any type of investment products. No matter how successful a stock has performed, do not put all of your money in that single stock, because should the stock price decline, you will lose some or all of your money. Try to invest in different types of stock from different industries. Chances are, if stock prices are going down in one industry, then they are rising in another industry. Diversifying helps to smooth out the rise and fall in investing.
In a future post, I will share the different ways you can go about purchasing stocks. Please like and share this post if you found the information valuable. If you have any questions or comments, please leave them below.