Most people have heard of the stock market, but have you ever truly thought about what that means? Have you ever wondered: “What is a stock?” Today, we answer this important but often overlooked question.
Definition: “What is a stock?”
A stock is a partial ownership share of a company.
What does this mean?
The terms “stock” and “share” are used sometimes interchangeably. The reason is that for publicly traded companies, no single person owns the entire company. Therefore, each stockholder “shares” in the ownership of the company. If you own 1 share of Apple, and there are 100 shares available, then you own 1% of Apple as a company.¹ This means that you will receive 1% of the dividend that Apple pays out every quarter, and you are entitled to 1% of the profits that Apple makes every year. This includes those profits which Apple chooses not to pay out as a dividend, but instead reinvests back into the company.
Let’s take this example further. When a customer walks into an Apple store and buys an iPhone for $649, you as a shareholder are entitled to a portion of the profits of that sale. Let’s assume that Apple’s margins on the iPhone are 40%. That means that Apple made a gross profit of $259.60 for providing the value of an iPhone to that customer. Since you own 1 share of Apple, and thus own 1% of the company, your personal profit on each iPhone sold is $2.5960. If Apple can sell a lot of iPhones then you will make a lot of money by owning shares of Apple.
That’s what it means to buy stock in the stock market. You are purchasing actual ownership of actual companies. You share in actual profits that are made on every single product or service sold. If you own shares of Apple, then you make money off of every iPhone. If you own shares of Starbucks, then you make money off of every single cup of coffee they sell. If you own shares of Walmart, then you make money off of every single item sold in the many Walmart stores throughout the world.
Stocks are quite simple. When you own stock, you own a piece of a company and share in all of the profits that company makes. The stock market is simply a collection of all of the major public companies. Thus, the stock market makes it easier for you to find and purchase (or sell) ownership in these companies. As long as you focus on what it truly means when you buy stocks, then they will seem less intimidating.
Some people fear the stock market and call it gambling. I call it a miracle of capitalism. The stock market is a place where you can take the money you worked hard to earn at your job, and easily become an owner of major companies that make a lot of money. Never before in the history of humanity has it been easier to have your money make money for you.
How do you think of stocks? Is there a different definition that you use? Did I give you a new perspective on stocks? Leave a comment below and share your thoughts.
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¹Most companies, including Apple have far more than 100 shares of stock. Most have over a million or a billion shares of stock outstanding. The principle still applies though, as each share that you acquire is a greater ownership in the company. Eventually they can really start to add up.