The stock market is something you’ve heard of. But how much do you actually understand about the way it functions? More importantly, how can you benefit from it?
Stocks are actually straightforward.
Stocks, or shares, represent individual portions of a company. Not physically, but in a financial measure of how well the company is doing.
Here’s my analogy: Imagine you’re at LEGOLAND®. Even if you’ve never been there, you can imagine it. We’re talking about sculptures bigger than dump trucks, made up of regular old Legos. They have entire cityscapes throughout the park.
Take for example this one replica of the US Capitol at Legoland in California. It has 400,000 individual Legos in it. There are about 57 million total Legos used to build everything at Legoland. Just think for a minute what 57 million Legos looks like…
Now let’s say that One Lego = One stock or One share. And Legoland, as a whole, is the stock market. Each company listed on the stock market is like the Capitol Building here. Upon closer inspection you can see the individual pieces and how it would break down.
Are you starting to visualize how massive the stock market is? It’s mind blowing to think this is just scratching the surface, since a company like Apple or Starbucks has tens of millions of shares alone.
So one share is a very, very small portion of a company. Again, not physically a portion the company itself, but a financial interest in a company.
Put another way, stock is equity in a company. Similar to the way you have equity, or ownership, in your home. Stock = Equity = Ownership. This is why stocks are also referred to as equities in finance (think terms like: equity portfolio, shareholder equity, or equities as a blanket term).
Why Would I Want Them?
To get rich, of course! But how…?
Example: Let’s say Legoland’s Legos are shares. And that when you visited Legoland as a child, you bought one Lego for $1. You tuck away that Lego in a box. 25 years later, you bring back your Lego when you’re taking your children to visit Legoland. Legoland offers to buy it back from you for $6.
Maybe that doesn’t sound impressive to you. But try multiplying the numbers by thousands of dollars (or thousands of shares). It’s impactful. And don’t forget, along the way, Legoland has given you extra Legos and mini figures (which are also worth something) just for owning that one original Lego.
In real life, when you own a stock you will likely be financially rewarded in one of two ways (possibly both).
1) Growth of the value of your stock. Like in the first example, you can expect the value of what you own to grow about 6 to 7% yearly (on average).
2) Money is given to you simply for owning that stock. A few times a year, companies who have large profits give portions of those profits to people owning their shares. That’s right. If you own a share of certain companies, they will deposit money into your account. They call that a dividend.
^ This statement may excite you, but it should also sound the alarm in your head. ^ That’s why it’s imperative large corporations, like Coca Cola, have massive sales numbers. These companies have shareholders who are expecting money from them. If they don’t pay them, the people may sell Coca shares and buy shares of another company who has a better payout. Remind me to tell you about how this ties to our parents’ retirement, putting your money where your mouth is, and government lobbying. Another day…
Ok, So How Do I Get Some Shares?
Stocks must be available on the New York Stock Exchange (NYSE) or Nasdaq (referred to as the ‘markets’ or ‘exchanges’) to get your hands on ’em. Hence the term stock market, which actually is a marketplace for stocks. [There are other ways to get stock, but they aren’t all that common so I’m skipping it for now.]
There is a one-time deal where the company sells stock itself through an exchange. That’s an IPO, which I’m sure you’ve heard of. Think Snapchat, Blue Apron, Alibaba. Otherwise, the stock exchange is the marketplace of stock selling between individuals like you & me. If no one is selling, then no one can purchase.
At the creation of the New York Stock Exchange, there were people [traders] working on the floor of the NYSE to match up the buyers and sellers. If you owned stock, your stock broker would call the order to people working on the floor, where it would be written down and matched up with someone wanting the opposite side of the order.
It’s almost like consigning your furniture, or selling clothes on Poshmark. You sell to a dealer, who then sells it someone else. Except, the transactions are almost instantaneous on the NYSE.
You can’t post a stock as “For Sale By Owner.” It must go through the stock exchange to be sold or purchased. I’ll get into why this is the case in another post. You can gift stocks to your favorite charity though… which also lets you put your money where your mouth is. More to come on that too.
Recap: One stock = One Lego, at Legoland
Let me just add, stocks are not:
Or any other acronyms thrown at you.