Welcome to professorsavings.com, we teach finance basics. Today we will teach you what stocks are.
Hi I’m Rayfil Wong. We hope these investment concepts will help you be a better investor.
A stock is a share of the ownership of a company. As the owner of a stock, the stockholder, you have a claim on a company’s assets and earnings.
Supposed Professor Savings is starting a company, Pies R Us, he needs $100,000 but doesn’t want to borrow from a bank.
Instead, Professor Savings invests $10,000 of his own money and finds nine other investors who are willing to invest for $10,000 each. In return, he gives each investor a certificate that represents 10% of his company.
Each certificate represents 10% of the company’s assets: the building, the pie pans and the baking materials and 10% of any future earnings.
After one year, the company is doing well and the company’s total value increases to $200,000. This means each share of the company is now worth $20,000 – two hundred thousand dollars divided by 10 shares. That’s twice the original $10,000.
The original investors can sell their stock in the company to other investors for a 100% profit. This is how stocks work. Stocks are bought and sold daily on the major exchanges.