Plain English Investing in Bite-Size Pieces: What the Heck are Stocks?

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If you plan to invest for longer-term goals, such as college or retirement, you need more than what a savings account can offer.  Perhaps you are considering buying stocks.   But what are stocks, and are they right for you?

Buying a stock is actually buying a piece of a company.  While it might be an infinitesimally small piece of that company, you are still an owner.  Companies issue stock to the public when they want to raise money to grow the company.  In essence, the company is saying, “Hey, we’ve gotten this far on our own, but now we need big bucks to grow even bigger and more wonderful.  So, give us some money, and we’ll give you a piece of the action.”

Once the initial offering is over, there are thousands (or more) people who own a piece of the company.  From that point forward, the number of shares, or pieces, of the company, is static, unless the company offers more.  People who trade in the stock market are buying and selling existing shares of companies.

As a stockholder, or shareholder, you are an owner, and you have a vote on how the company is run.  The opportunity for you to voice opinions comes through attendance at shareholder meetings.  While likely full of boring data and statistics, it can be instructive to attend one of these meetings.  Shareholders who don’t attend the meetings get proxy vote materials in the mail to vote on various resolutions.

The reality of the situation is that as a small shareholder, you don’t have much sway.  There might be millions of shares of a particular company outstanding, and if you own just a few shares, you’re generally outnumbered.  The shareholders who have the greatest impact tend to be the institutional shareholders, such as pension funds and mutual funds.

Are stocks risky to own?  They sure can be.  One of the time-tested strategies for success as an investor is to not put all your eggs in one basket.  In other words, if you have $10,000 to invest, don’t tie up the entire $10,000 buying stock in only one company.  A mixture of types of investments — stocks, bonds, cash — is your best approach.  Using a mutual fund or exchange-traded fund (ETF) is another way to reduce your risk.  A fund is invested in dozens or hundreds of stocks or bonds, and that spreads out your risk.  I address diversification (or not putting all your eggs in one basket) here. <link>.

Don’t let investing in stocks scare you.  Just realize that you should not blindly start investing.  Being a smart investor does require some legwork.  I provide some basics here at SimpleMoney intended to elevate your knowledge, but smart investing requires some diligence and patience.  It isn’t rocket science, but it can be complicated.  We’ll make it simpler for you!

Do you love or hate stocks?  Share an experience you have had with stock investing.

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