Home » sin stocks » Sin Stocks Report: Summer Of Sin #2 — What Are Stocks?

Sin Stocks

Sin stocks. That’s what we’re all about here. So, to get us up-to-speed on what that means, we’ve already answered the first question, “what is sin?” to understand the basic term. Now the question is, “What are stocks?

Hey! I saw you roll your eyes. And, while YOU might be the next Warren Buffett, not everyone is. So we’re writing this. (Besides, you might even be surprised at what you learn.)

What Are Stocks?

Companies need money to grow and operate. That money sometimes comes from income generated from sales. However, there are times when a company wants a big influx of cash. So, they find people who want to “co-own” the company.

In the simplest terms, let’s say you own a failing video rental store, and one day you to expand from your podunk town into the next podunk town down the highway. So you find someone who wants to partner with you for a share of the company. The other person pays you a bunch of money and becomes a 50% shareholder in the company. You both co-own the company.

That’s a really basic example. Now let’s get a bit more complicated. What if they pay you less than half and you give them 25% of the company. Or, what if you want a lot of money but want to retain control, so you sell half of your company in 10% parcels to five people. They own a portion of the business and you still control it and do all the work but you have their money.

They may choose to sell their ownership to other people, or perhaps you give them a small piece of the profits, depending on the percentage of ownership they have.

Those people are shareholders in your company. The purchase of ownership, and any subsequent transaction (such as if they sell their ownership to someone else) is all done privately.

You’ve got the company, which is owned by shareholders. Make sense?

Now expand idea by a factor of millions.

Instead of one crappy, failing video rental store, you are Steve Jobs and you started Apple. Or you are Sam Walton and you started Walmart.

You start a business, you need cash, and you sell shares of your company to other people. The difference between this larger example and the video rental store is size. Apple, Walmart, Microsoft, General Motors, IBM, Coca-Cola, 3M, etc., etc., these are massive companies. And instead of selling one share at a time to individual buyers through a private sale, there is a whole infrastructure set up — an exchange, and brokers, and trading accounts, etc. — all created to help these large companies break up into shares and then sell those shares to people.

As the owner of Apple, you own a piece of the company. Don’t get too excited, though, because millions of people own hundreds of millions of shares. Each share is a vote at the Annual General Meeting. (But it’s easy for your vote to be drowned out so don’t bother trying to get them to finally make a hot pink iPhone.)

The value of these shares rises and falls based on choices the company makes or results of the company’s efforts. As the shares rise and fall in value, shareholders buy and sell their holdings to make money. So, for example, you might have bought Netflix when it was struggling around $10.00/share and then you enjoyed it as it climbed to $50.00/share when you decided to sell it. That’s the principle of buying low and selling high, and although that’s not the only way to make money on the stock market, it’s a good first step.

This is a super-basic overview of the stock market — the concept of stocks and the way people make money.

Yes, it gets more complicated but this is all you need to know to get started. (Disclaimer: if this information is new to you then maybe hold off on investing just yet and learn a bit more first!)

DISCLAIMER

Nothing on this site is a recommendation because, hey, I can't read your mind and I don't know what you have in your portfolio, and I'm not a licensed financial advisor. So never EVER trade without doing your due diligence. If you want more information about this fascinating topic, please check out the Sin Stocks Disclaimer page which basically says the same thing but more emphatically.