Stocks Basics

Stocks are fractions of companies that are sold to people like you and I. When you buy stock in a company, you are actually owning a small piece of it. Can you imagine the look on someone's face when you tell them, "I own McDonalds"?

How Does a Company Sell Stock?

In order for you and I to buy stock in a company, they first have to issue it. They do this by going to an underwriter. They tell this person how many shares of stock they want to issue to the public and the underwriter sets a price for the stock and sells it in an Initial Public Offering (IPO).

The underwriter doesn't go away empty handed. They charge the company a commission to sell the stock to the public. For example, if a company decides to issue 10 million dollars worth of stock, then they might sell 9 million dollars of the stock to the public and keep 1 million for themselves.

Why Do Companies Sell Stock?

Companies sell stock in order to gain money that will allow them to grow and buy more things. Some companies cannot afford to keep growing on their own so they sell parts of the company to shareholders.

Why Do People Buy Stock?

People buy stock in a company in hopes that their investment in it will grow and they will make more money. They can make money in a stock by two different ways.

The first is by receiving a dividend. A dividend is an amount of money that each shareholder is given that comes from the money made by the company. This means that for each Big Mac that McDonalds sells, you would get a very small amount of money. When a company makes money, they decide whether or not to pay their shareholders some of the earnings. If they do decide to pay the shareholders a dividend, they decide exactly how much to pay for each share. The more shares you own, the more money in dividends you will receive.

The other way an investor can make money is by having the stock price go up. This is generally how most of the money in a stock is made. The price of a stock will go up when there are more people that want to buy the stock than want to sell it. If more people want to sell it than want to buy it, the stock price will usually go down.

People also buy stocks so that they can have a part in making decisions that affect the company. Companies have annual meetings to decide on things like whether to issue more stock or not or if they want to elect new people to the board of directors. When a company issues stock, they give up some of their rights to decide things like this.

Types of Stock

People often refer to stocks as penny stocks, growth stocks, and blue chips.

A penny stock is stock of a company that is often very small and will most likely never become a large company. These stocks are usually very cheap (under $2).

A growth stock is stock of a company that may be growing rapidly or have a lot of potential for success

Blue chip stocks are stocks of large, well-known companies like AT&T, Coca-Cola, and General Electric.

See, learning about stocks isn't that hard. Now you should have an understanding of the basics of investing in stocks.