Investing in a Stock

A stock represents ownership in a particular company. When you listen to the press, you may hear talk of “company earnings”, “81.3 million shares up on this week”, “The numbers are looking up” or “You Can Bank it”. All of these terms are used in the press in regards to the stocks of private companies and for private businesses (not public companies in the American system). The press loves stocks. They love them because if a private company earns more money or is doing well, the stock price usually does, too. The reason a stock or stock market works is that investors buy and sell stocks because one investor wants to make money when another loses money. For example, John W. (John W. below) wants to buy a stock of Google. He has drafted a check for $100,000.00 and has put $7,000.00 down. He plans to wait until the price of the stock is $ honeymoon price, which is $120, which is how low he will go. Each share of Google is worth $10.00 right now and he will take $100,000.00 of stock. OnAutomatic explains that a stock bananas a price stagnancy. When John is buying Google and waiting for it to price out, the people holding shares at the lower price will have to sell. The billions of shares are simply not going to move. So what happens is John tries to sell shares of Google at $24.33 a share. No one is buying at that price, so price was free to float. If John had waited another five weeks, it may have been close to $25.00 instead of $120. So the stock market allows a buyer to buy the stock he wants (a price he wants.)

Markets are driven by the reactions of other investors as they become fearful or greedy. The market is like a equilibrium where investors balance each other out to reduce the risk of losing their money to an amount at least equal to an expected gain. The difference between the price at which investors buy or sell depends on their expected gain or loss. The more investors think the price will go up in time, the cheaper the shares are going. The opposite is true if investors think the price will go down. Obviously, shares of private companies are more difficult to sell because not everybody knows how the company is doing or what its future may hold. Share prices fluctuate more, so investors have more control over their trades. Looking at visible publicly traded stocks, iShares offerings consist of companies that are generally stable. Commodity and energy stocks are more volatile and can rise or fall significantly. The farther away you are from a company with a steady record of earnings, the more attractive it is for the retail investor.

But there are other types of investments that are also more difficult to invest in: savings accounts, bonds, stocks that are traded on the literal exchanges (stock exchanges), and mutual funds. Savings accounts earn a very low interest (less than 1%). Bonds are basically loans to a company or group of companies that promise to return a specific amount of interest payments over a specified period of time (year, a lifetime). Stocks are contracts to buy a share of a company. When you buy a stock, technically you own a piece of ownership in the company. Savings accounts are not going to produce any income or returns since they are not invested, and are not leveraged. Mutual funds are leveraged and are subject to changing market conditions. The key to investing is to find a well-diversified portfolio of securities of lesser traded companies or groups of companies with a long track record and consistent management. The information in this article is simplified for ease of use. Contact our office for more information on investing.