Let's talk about stocks!

Some people are either afraid or excited about stocks for different reasons. Some think stocks are evil and will help you lose all your money. Some others think it's like playing in casinos and you have a chance to win big time...

Those people who see stocks as a huge gambling machine cannot be more wrong.

I'll tell you what a stock is and it's very simple to understand: a stock is a share of a company.



That's it. It's not lotto! It's just a part of a company. You see,a company needs money to run. That's called Capital. Some businesses need so much money that they are asking people help fund their capital. You give them your money and they'll give you a title. That's a stock. With the money you give them, they'll invest it in their business in order to make profits. The place where that money is exchanged is called the stock exchange. In the Philippines, it's called Philippine Stock Exchange or PSE.

You might ask, why do people think a stock exchange is like a casino. Simply, because the price of the stocks fluctuates up and down for many different reasons. People tend to think that they can win more money if they bet on the right stock.

The truth is you can make short wins in stocks but the other side is that you can also lose BIG. People who think this way are gamblers. The professional title of a gambler is a speculator.

The correct way to see stock is that it's a part of a company. If the company is doing well, the stock price will increase because everyone would like to own one part of it. If the company is doing bad, the stock price will decrease because the shareholders of the company  don't believe in the company anymore and decide to sell it at a lower valuation.

Let's take an example: when you buy a share of McDonald's, you own one part of the company.  If McDo is selling more hamburgers, people want to own some shares too and you can sell yours at a higher price. If McDo is selling less hamburgers because people become weight conscious, you might want to sell your stocks because you find that the price will not increase anymore.

Other factors also affect the price of a stock. The industry performance, global and national economy and many other reasons.

For example, if the global population decided to be weight conscious and avoid all the fast food chains, for sure your McDonald's shares will lose value.

Let's say that you own stocks of a Greek company and the economy in Greece is not doing well because they have too much unemployment and they can't pay their debts anymore. For sure, the value of that stock will decrease.

Remember I said that if the company is making profits, the stock price will go up and will make you richer?  Not only will the stock price go up, but the company can decide to share their profits with the shareholders. Those people like you and me that believe in their company. They'll simply share a part of their profits to you. That's called Dividends. They'll send you money on your bank account. They can also decide to reward you by giving you free stocks! Would you like to not only see the price of your share going up but also receive money from the company or free shares?

I'm sure you do. I love receiving free stocks or seeing more money in my bank account without having to work for it.

There's already so much to say about stocks that I need to continue on the next post: the winning stock strategy :-)

If you have any question about investment strategies or if you decided to start taking action towards being a millionaire, contact us via email on pinoyfinancialcoach@gmail.com

 

Photo credit: By Downingsf (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons