By Thomas Abrahamson, Spring 2014 Student Intern
In this article we will be discussing what a stock is as well as what some advantages and disadvantages of it are. To truly understand the stock market you first need to understand what a stock actually is. A stock is not just some intangible item that you can purchase. A stock is an ownership interest in a corporation and by purchasing a stock you are actually buying part of the company. That said, unless you are willing to invest a substantial amount you will generally not own much of the company. For example, assume that one share of Apple costs around $500. If you purchase $100,000 worth of Apple stock this will get you only 200 shares. Since there are around 892 million shares of Apple on the market, by purchasing 200 shares you will only own .00002% of the company.
There are generally two ways to make money from the purchase of a stock. These are dividends and appreciation. A dividend is a payment made by a corporation to its shareholders. Usually these payouts are made in cash, but sometimes companies will also distribute stock dividends, whereby additional stock shares are distributed to shareholders. Appreciation refers to when an investor buys a share at a lower price than what they sell it for. If the company does well the value of your portion of the company will increase in value. Unfortunately the opposite is true as well. If the company does poorly then your stock is worth less. Stocks have both advantages and disadvantages that investors should consider before investing.
When looking at the advantages of purchasing stock over other forms of investment the main advantage is that there is no limit on the potential you can gain from a rising stock price. While in reality a company will most likely stop growing at some point, there is no set limit as to when that will be. This means that if you invest in the right company at the right time you have the potential for significant growth.
Another large advantage to owning stocks is that they typically outperform other investment options over any ten-year period. This makes them a great option if you have a longer time frame in which you are investing. Except for a few short periods, stocks have consistently outpaced the rate of inflation since World War II.
Stocks are also quite liquid. Liquidity is a term used to describe how easy it is to convert assets to cash. While cash it self is the most liquid asset, it does not grow in value. Stocks are a nice trade off between liquidity and value. While they are not immediately transferred into cash they usually can be within a few days.
The major disadvantage to owning stocks is the risk associated with them. There is no guarantee of any return on your investment in stocks. While you could make a substantial amount of money you could also lose everything you put in. Many stocks can be volatile, meaning that their price could vary widely from day to day depending on factors that are well beyond your control. This risk however, can be somewhat mitigated with the use of several investment strategies.
If you are interested in investing in stocks there are many more resources available to aid you. For more detailed information on what stocks are and what types there are check here. There are also guides to show you how to allocate and balance you portfolio between stocks and other investments. With all the information out there it just takes a little time and research. I recommend that you start by reading everything you can find on what you are placing your money in before actually investing.