What is a stock?
Generally, you can divide all businesses that exist on the planet into two categories: private and public.
A private business is… private. From that perspective, there is no easy way to buy shares in a private company. Anyway, shareholders of private companies are listed at Companies House and they have to file their accounts publicly. What’s very important (from a state’s point of view): you have little control over a private business. It’s like a small unknown world that exists without you: you just know that it is there, but that’s as far as it goes.
A public business is a business that is open to the public. It provides regular reports on its operations so that people and state know what it does. Why? Because people own it. Who manages it is a different story, we are now discussing the question of ownership, and it is clear: a public business belongs to the public or anyone (maybe, just two-three people) from the public who has enough money to buy its stock.
What does it mean to have a share in (or, stock of) a public company? Exactly the same as what it means to have a share in any business: you pay to participate, you share the bounty. When you have a share in a public company, you get a part of the company profit proportionate to how much of the company’s total value you own – you are the stockholder (shareholder) now.
“Wait, what is about shares and stocks all the time? Is it the same?” – a valid question. Basically, it is the same. It just so happened that nowadays, in the financial context, saying “many stocks” is roughly equal to “many public companies”, and “many shares” is like “many shares of a given company”. Essentially, it’s just a matter of linguistic accuracy, so don’t worry: if you own stocks, it means you own shares of public companies.
Stock: in a nutshell
So let’s recap: a stock, or a share, is a part of a public company. If you buy it, you own that part of the company and get a part of its profit that corresponds to your part in it. Easy. No? Alright, let’s make it even easier.
A goat, in fact. Imagine you have a friend, and your friend has a farm, and on the farm he has goats. What can one do with a goat? Own it. Ownership costs money: you buy things to own them. Now, your farmer friend needs money and offers you half of a goat for a price. You like the idea: you pay the money and buy half of a goat. So now, you own 50% of a goat – that’s your share of the animal.
What else can one do with a goat? Milk it. Your goat gives milk. Milk gets sold. You own 50% of the goat – so 50% of the milk belongs to you as well (unless all the milk comes from the side of the goat that still belongs to that smart farmer). Therefore, you are right to expect 50% of the total milk profit into your pocket.
Then, imagine, you have another friend who has an obsession – he likes goats (just a hobby). You meet him and say something like “By the way, you know, I have a share of a brilliant goat…”. Your friend becomes immediately excited and begs you “Buddy, just tell me how much you paid for that part of the goat you have – I’ll give you three times more than that, just sell it to me!”. But you are smart and underline the fact that this is a very unusual goat: it gives huge amounts of milk which once converted into cheese turn into gold! So now, your friend is ready to pay you five times the value of the goat share you paid to the farmer. You shake hands, he pays you: you get the money (five times more than what you paid – not bad!), he gets the goat. You are happy, your friend is happy, the goat is happy.
Now, if you put “a company” instead of “a goat” here is how the story will look like. One of your friends told you about a profitable public company, and you decided to have its stock: you bought 50% of its shares… and started milking it. The company sales were good, so every time there was a profit, you had 50% of it – that was your stock dividend. You liked it. Then, you met an investor who was amazed at your investment and wanted to buy your stock in that company. You gave him an upbeat impression of that business so he offered you 500% of what you paid for the stock initially – he said that was the market price at the time. So you agreed, he got your share of the business, you got the money. After that, you’ve lived a happy life of a proud stock investor who managed to make a 500% capital gain and sell the stock at the peak price…
You know, a goat can stop giving milk. Maybe, because of the bad grass it feeds on, maybe, because of stress and lack of social activity, but milk may just stop coming. Will it be a useful goat then? No, it will be quite useless. Would you be ready to pay much for a useless goat? No, not really. No one would. The same is with any business: if it stops making good profits, it’s no longer attractive for investors, they don’t see it as valuable, and the price of its stock drops: no one wants it.
So, basically, when investing, you just have to make sure that you are buying a goat that gives milk. How to do that? Orca gives you all the tools to do verified investment decisions: direct news feed, stock analytics, 24/7 in-app support chat, and much more. So, you will be always all-armed in the world of stock investment.