What is a stock?
- Part ownership of a business
- Example: lemonade stand
- You and your friend each put in $5 to start the business ($10 total)—you each own half of the business
- Shares might cost $5 each—you each own one share; or maybe $1—you each own 5 shares
- Example: lemonade stand
- What determines the price of a
stock??
- In the lemonade stand example
you and your friend each put in $5 and owned half the business. But, is your
share of the business worth only $5? The reason you spent your $5 to start the business
was to make more than your $5 back. If you make a lot more money your share of
the business will be worth a lot more than $5. Stock shares are a part
ownership in a business, so the expected future income contributes to the stock
price
- If income is expected to go up, the stock price will go up
- If income is expected to go down, the stock price will go down.
- Simple supply and demand will also cause stock prices to go up and down
- In the lemonade stand example
you and your friend each put in $5 and owned half the business. But, is your
share of the business worth only $5? The reason you spent your $5 to start the business
was to make more than your $5 back. If you make a lot more money your share of
the business will be worth a lot more than $5. Stock shares are a part
ownership in a business, so the expected future income contributes to the stock
price
- Stocks are sold on stock exchanges — in-person or electronic markets where buyers and sellers congregate to trade stocks. It’s not a whole lot different from a flea market. The StockTrak platform connects you to the marketplace, so you can buy and sell stocks.
Buy some stocks—about $30,000 worth. That’s $5,000 or $6,000 each of 5 or 6 stocks. Here’s how to find the stocks:
- Make a “watch list.”
- What products do your friends
and family use?
- Brands of shoes, clothes, food, cars, cleaning supplies
- Where do you shop? Stores? Online?
- What other companies do you know? Apple, Samsung, airlines, Social Media,…?
- What products do your friends
and family use?
- Do you have a product you think
might make a good investment?
- Type “Who owns [brand name or
product name]” into your browser and hit ‘enter.’
- Try “who owns Funyuns.” You should see that Pepsi makes Funyuns.
- Type “Who owns [brand name or
product name]” into your browser and hit ‘enter.’
- Group your companies by the
industry they are in.
- Clothing, food, electronics, sports, or car
industry, etc.
- On the ‘Research’ dropdown list choose ‘Advanced’
- Start typing the company name in the box to the left of the “GO” button; a list of possible symbols should pop up
- On the left choose Company profile; scroll down to “Industry Classifications”
- Choose five or six companies in different sectors and industries.
- This is diversification.
That’s a fancy way of saying you do not want to put all your eggs in one
basket. If hard time befalls an industry, sector or type of asset, you do not
want your whole portfolio to suffer, so spread your investments out.
- A well-diversified portfolio (the group of stocks you own) in the real world should have a minimum of 15 individual stocks
- Diversification also involves investing in different asset classes, such as stocks, bonds, real estate, gold, oil, and so on.
- Mutual funds and ETFs are the easiest and most common way to achieve
diversification without all the work of analyzing individual stocks,
industries, economies, assets classes, etc.
- Mutual funds collect money from many investors to buy stocks; $100 is not enough to buy some stocks, but a $100 investment in a diversified fund automatically buys diversification.
- ETFs are similar to mutual funds, but are bought and sold differently.
- Most retirement accounts (401(k) and IRA) limit choices to funds
- Clothing, food, electronics, sports, or car
industry, etc.