Buying a company’s stock is one of the oldest and simplest investments in the business world. In short, you’re making an investment in a company. If that company performs well and grows, the demand for their stock will go up, so too will the stock price, and you can can then make money by selling the stock or collecting benefits like dividends.
Anyone can buy stock, which makes it accessible for even the most unskilled of investors. In order to understand what stocks are and how you can make money with them, lets break it all down.
What are stocks?
Stock are effectively shares of ownership of a company. If you own enough stock, say 5-10% of total shares, you’d have significant influence on how that company is run. If you own just 1-10 shareS of a company, you still have influence, but your votes on important decisions will be less of the total votes, so it won’t matter as much.
Most stocks sold on the open market for individual companies give you the right to vote in shareholder meetings. This means you can vote on who is on the company’s board, whether they acquire a certain company, and so on. All that is cool and all, but it’s not why stocks are usually bought and sold.
Why & How are stocks bought and sold?
To make money. Investors buy and own stock in order of making a return on their investment. You can buy a stock whenever and sell a stock whenever, as long as there is a buyer and seller willing to take up the other side of the deal. Most of the time, you aren’t buying from the company directly, rather you’re buying from another stockholder who wants to sell their position.
Companies initially sell their stock in something called an initial public offering, or through other public offerings of stock to raise money without having to take out a loan. But all that said, how do you make money while buying and selling stocks?
There are two primary ways.
1. The stock appreciates, or in other words, other people are willing to buy that stock for more money. If the company makes great decisions and turns more profit, more and more people would want to own their stock to make money with them. This increase in demand drives the price up, assuming the total number of stocks on the market stays the same. This is simple supply and demand. If you are selling a painting and you only have one person bidding, it’ll probably go for cheap. However if 10 people are bidding for it, it will likely go for a lot more.
Stocks can appreciate for any reason and their value is tied to a number of factors that don’t always tie back to how much money a company makes. Since stocks are sold on an open market, through an exchange, their price is more a reflection of buyer sentiment, or how good or bad people think the company will do. Stocks for companies that lose millions of dollars each year can go up in price if the market thinks they will be more and more successful very soon.
2. Dividends. Some stocks, but not all or even most, pay dividends. Dividends are payments directly from the company made to shareholders that come from the company’s profits. Think of this as a way to entice people to buy a company’s stock and hold onto it. Dividends are paid quarterly and the amount varies by company, but its a set amount for each share that you own.
Companies would want to pay you a dividend so you hold their stock and don’t sell. Supply and demand means this will drive the price up over time. Companies want their stock price to go up so that the shares that they still own are more valuable as well as any shares they decide to sell or offer in the future can be sold for more money, generating more investment money for them.
How do stocks work?
We’ve covered what stocks are and how you make money with them, but what other technicalities are we missing?
Companies sell shares or stocks in their business to raise money without taking out a loan that they have to pay back. After a company sells a share, it goes onto the open market, so after the initial offering from the company, you buy shares from other investors, not the company.
All of these transactions are handled through stock exchanges on the open stock market. We have another post about that if you want to learn more about how the stock market works in detail.
You, the investor, buy stock through a stock broker or brokerage. You can use online platforms like WeBull, Robinhood, or Etrade to name a few. Some platforms charge you fees when you buy or sell a stock and others are free.
When you do own a stock though, what does it mean?
What does it mean to own stocks?
There are different types of stock that give you different rights or perks for a company. Most investors buying and selling on the open market will own what is called common stock. Common stock gives you voting rights and can pay you dividends. That’s about it though. There are other types of stocks, like preferred stocks. The main difference is that preferred stocks have less volatility, so they’re a more secure investment in most cases, and they usually get higher dividends. However, preferred stock owners don’t usually get voting rights in the company.
There are other types of stocks, but they’re a little beyond the scope of what any beginner or even experienced run of the mill investor needs to know.
Long story short, owning stocks just means you hope the company does well so you can sell your stock for more than you bought it for and turn a profit too. Stocks fluctuate all of the time, so when buying or selling any given stock, you’ll want to weigh your investment strategy. Are you hoping to sell this in a month, or are you going to hold the stock for years? Each strategy presents different levels of risk and returns.
Are there other forms of stock?
Lastly, there are other forms of “stock” you can buy on the market that don’t represent just one company but rather represent a bunch of companies. These are called exchange-traded funds, or ETFs. They are essentially a bunch of companies’ stocks lumped together in one stock. You could buy a technology ETF, meaning you invested in a bunch of technology companies without having to own each of the stocks individually. This spreads out your risk, provides you more stable growth, and gives you good exposure to the market as a whole. Of course, the potential for explosive growth and returns is usually muted as well.
And that just about does it. Hopefully you understand a little bit more about what stocks are and why they exist. If you want to start trading for yourself for free, you can download and install WeBull at this link. When you sign up and make a deposit, you’ll get 2 free stocks.