I’ll say it, the stock is the single most important investment item in our current society. But what is it? A stock is a note acknowledging the ownership of one share of a company. If I have 1 share of JP Morgan stock, I can easily exchange that on the open market, aka a stock exchange for around $37 (as of this writing).
But what can I do with my 1 share of JP Morgan?
My 1 share represents ownership in the bank. Technically, I own a part of this bank. My one share entitles me to one vote in shareholder meetings, meaning I can have an impact in the direction the bank takes. In reality, my share is one of almost 3.5 billion shares, and so my vote is not very important.
Why would I buy a stock?
We buy stocks because it is an easy investment. You don’t want to keep all your money in a bank account, so you invest it in other companies. Over time, if the company is profitable, the value of the stock might increase. If you bought JP Morgan for $30 and now its $37, you can sell it and take that $7 profit. Its called a capital appreciation; and yes its taxed, but at a less rate than normal income. This is the government’s way of incenting you to invest, as this stimulates our economy.
Why would a company issue stock?
To get money. All companies must get money somehow to grow. One way to raise a lot is to take the company public. The company must be a corporation and has registration filings to go through. Afterwords they are listed on a stock exchange for a certain price, and investors start buying. The company can buy back stock or issue more if they need more money.
Stocks are mostly purchased by institutions on behalf of investors. Because it costs money to buy or sell a stock (also called a trade) these transaction costs can add up over time, even negating the gains made from the capital appreciation. These institutions buy thousands and millions of shares at a time. Some companies’ only business model is to buy other companies. Warren Buffet’s Berkshire Hathaway comes to mind. All they do is buy other companies, using their management expertise to guide their new partners in a direction that will increase profits.
In order to get control of a company, you must own more than 50% of the firm. If that is the case, you control the majority votes and none of the other shareholders can outvote you. Its not uncommon for the founder of a company to issue stock for 49% of the company and keep the other 51% so they can maintain control but still raise money.
So to sum up, a stock is a representation of ownership in a publicly traded company. You can buy just one share or all in a company. The number of shares you own represents how much of a company you own relative to the number of shares outstanding. Companies issue stock to raise money, and investors buy in hopes of getting a cut of the profits. It is the most important investment vehicle of our capitalist society.
Come back for Weakon 235 another day to learn more about stocks.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
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