STOCKS 101: Part 1
By: Serena Patel
Personal finance, accounting, and investing are basic and vital subjects that should be taught in school to everyone, but since they aren’t, I’m here to help. I’ve taught this to my 11 and 12 year old sisters. It can be intimidating to ask friends or family because you’re scared of asking “dumb” questions. No question is dumb. I will start with the very basics and walk you through understanding and potentially executing.
This is all very high level and contains a lot of information, so it will be split into a 2 or 3 part series. There will be related articles about stocks and other investment types to follow. Please comment or email us to ask any other questions you may have whether to further explain or clarify.
What are stocks?
The most basic definition: stocks are a share of ownership in a company issued to the public to raise capital (money).
By owning shares of a corporation, you are a shareholder, but you do not actually own the corporation (a common misconception). Although you have the right to vote in shareholder meetings - the more shares you own, the greater your voting power (indirect control) - you can receive dividends (a small portion of profit paid out per share), and you have the right to buy more or sell your shares.
What is the difference between a share and a stock?
“Stock” refers to any or many companies and is a general term; “share” refers to a particular company.
Ex. I own a lot of stocks. I have 10 shares of XYZ.
A company issues shares when they don’t want to borrow money in the form of a loan or issuing debt (bonds).
Example: Company A wants to raise money to grow their business or take on new projects. Company A goes public and is selling 1,000,000 shares for $5 each in order to make $5,000,000.00. You purchase 100 shares for the total amount of $500.00 (100 times $5.00).
2. Why should I consider investing in stocks?
Do you currently have money sitting in your checking or savings account? How much do you gain from interest on that amount yearly? Not much, right? That is why you should consider investing in stocks.
You buy stocks you believe will be worth more in the future than the price you are paying for it now. You invest in what you think will have a high return.
Example: You bought 100 shares of Company A for $5.00 per share in July 2018. Over time, you notice the price sometimes goes up, sometimes goes down, but is moving in a positive direction. One year later, on July 2019, each share is now priced at $7.50. If you sell all 100 shares, you sell it for a total of $750.00 which is a profit of $250.00 (minus your initial cost of $500.00 to buy the shares). You gained 50% on your investment.
If you left that $500.00 in your savings account and the interest rate on your account was 1%, you gained $5.00. 1% is honestly a high-interest rate for a savings account. Most checking and savings accounts are between 0.01-0.06% on average which is nothing.
WARNING: Stocks are very volatile, meaning they change rapidly and unpredictably. Everything happening in a company day-to-day, in an industry, in a country, and in the world impacts the share price. It is risky and you can lose money.
Example: You bought 100 shares of Company A for $5.00 per share in July 2018. Over time, you notice the price sometimes goes up, sometimes goes down, but is moving in a negative direction. One year later, on July 2019, each share is now priced at $2.50. You decide to sell your shares at a loss because you believe the stock price will continue to drop over the foreseeable future due to the various negative factors impacting the corporation. You sell 100 shares at $2.50 for a total of $250.00 which is a loss of $250.00 (you initially bought it for $500.00).
3. How much money should I invest?
That being said, you should start off by investing an amount you would be willing to lose (absolute worst case scenario). Maybe it’s $500.00 (or more or less) to first start off until you feel more comfortable.
Stocks can be riskier but can amount to short or long-term gain depending on your strategy. I personally don’t recommend you invest all your money or savings into just stocks. There are other ways, safer ways, to invest your money that I will discuss later. It is always good to diversify your investments.
4. How do I invest in stocks?
There are a ton of platforms you can use online or on your phone to start investing. Here are a few examples, but I encourage doing your own research to see the pros and cons of each.
You create an account with any of these platforms (or others), go through an application process, link it to your bank account, and transfer money into your trading account. Then your money sits in your trading account until you are ready to buy stocks. When you sell, the money goes back into your trading account as cash available and you are able to transfer those funds back into your bank account.
How do you compare those platforms? It depends on what you’re looking for: ease of use, best active trading, best interface, best research and tools, trading costs, products, mobile use, customer service, international trading, etc.
I use Robinhood because I’m still relatively new to trading and there is no commission fee (it costs nothing to buy or sell shares). It is also easy to use and not overwhelming. Although it does not have comprehensive research or analysis on the stocks, which is a con, but I conduct my research elsewhere.
I know this was a lot of information for our beginners, so I’ll stop here. Again, if you have any questions please comment below or email us. Check out STOCKS 101: Part 2 which will include the following topics:
Don’t spread yourself too thin.
How do I choose what stock to invest in?
Know When to Sell