30 Day Investing Challenge, Day 13: Know what a stock is
When you start investing it’s good to know the basics of the financial world so you have a vague idea of what you’re getting yourself into. You don’t have to be an expert, there are people who have literal Ph.D.s in this stuff. You just need to know enough to make an informed decision on what to invest in. So let’s start with the fundamentals:
What Is A Stock
A stock, also known as “equity,” is an entity that represents ownership of a company. Companies issue stocks to help them raise funds to run their business. Stocks are represented by "ticker” or 2-6 letter symbol. These ticker symbols are what you look for when you go to buy a stock in the open market (usually using your brokerage firm). For example, Google’s stock ticker symbol is GOOG. Stocks are paramount to investing. They’re the assets that will make up the bulk of your investment portfolio (and sometimes may take up all of it depending on your approach).
To purchase stock in a company you have to buy a certain number of shares. Because of this, the buyer of a stock is called a “shareholder.” Even if you own one share of Google, you’re still a shareholder. A shareholder’s ownership is determined by the number of shares they have compared to how many shares are owned by all other shareholders (this is called “outstanding” stock). For example, If Google had 1,000 shares of stock outstanding and you have 100 shares, you would own 10% of the company's assets and earnings.
So what does that mean for you? Each share is purchased as a specific price. The more shares you own of a stock, the more opportunity you have for your money to grow exponentially. For example, as of right now (April 12, 2024 11:23pm EST) Google’s stock price is $159.19. If you owned 10 shares of this you’d have $1,591.90 of Google. If the stock price went up to $175 then you’d own $1750 of Google, an increase of $158.10. If you owned 100 shares, your total would go from $15,919 to 17,500, an increase of $1581. This is why personal finance educators say to buy shares regularly so you increase the amount of a company you own.
One thing to note about owning a single stock: companies can also engage in stock buybacks, which increases the value of current shares and therefore benefit existing shareholders. However, companies can also issue new stock shares whenever they need to raise money, which dilutes the ownership of existing shareholders. Since it’s hard to predict what a company will do, it’s advisable to only put a small portion of your investment savings into single stocks, if at all.
Another thing to be aware of: owning stock in a company that goes bankrupt most likely means you’ll lose all the money you invested. If you’d invested in Circuit City in the 1980’s, your shares would’ve skyrocketed 8,100% during that decade. But if you’d held on to those shares, like most personal finance educators tell you to (including me), then they would’ve gone to zero when the company filed for bankruptcy in 2009.
Action Step: Study A Stock
Pick a company you really like and look up their ticker symbol
Take a look at the company’s performance over the last 1 year, 3 years, 5 years, and 10 years (if applicable)
Notice the dips and increases and take note how volatile the stock has been over the years. What was its highest point? What was its lowest point? Write these down.
If you’d like to invest, note that you’ll want to only invest 1% of your total portfolio in individual stocks to reduce the risk of losing your money if the company goes out of business one day. If you have nothing invested yet, hold off on buying single stocks until you’ve invested in index funds for about a year and have built up a portfolio for yourself. Then you can start diverting some funds to individual stocks.
Check back tomorrow for our next challenge: Knowing what a bond is.
Want to dive in deeper? My investing workbook “Your Journey to Freedom” will show you how to build the life of your dreams and teach you the fundamentals of the investing world.
Not sure where to start when it comes to investing? My FREE step-by-step investing guide will help build your confidence by walking you through buying your first index fund.
