What is a stock?
This article forms part of our ‘investing basics series’ and covers the common terminology you’ll likely encounter as you embark on your investing journey. Visit the Learning Center for more of our investing basics.
How do stocks work?
In a nutshell – Stocks are a small piece of ownership in a company. By buying stock in a company, you are entitled to receive part of the profits as the company value increases over time.
You can buy stocks in thousands of companies – from established global blue chip stocks (large established companies with billion dollar valuations) to small cap Swiss companies, there are plenty of options to start investing in stocks.
As the company becomes more profitable and successful the stock value increases, at which point you could sell the stocks you own for a profit.
That said, you are generally far better off buying the stock and holding for longer periods of time vs selling a stock as soon as you make a quick profit.
By holding for longer periods of time, you can reinvest any dividends through your stock broker, thus increasing your portfolio value and stake in the company.
Woah what.. dividends? Backup a second..
What are dividends?
Remember that owning a piece of the company means you are entitled to the profits they generate – those profits come in the form of a dividend. Essentially a slice of the profits which are paid to share owners.
Yes that’s right, it’s basically a payday!
And you could get dividends paid in cash into your bank account.
But Investing Hero says no.
If you are the early stages of your investing journey, and with the long-term investment game in mind, you are generally far better off reinvesting any dividend profits generated.
Related article: 8 Common Investing Mistakes You Must Avoid (Specifically step 1)
By reinvesting you are buying more shares with your dividend payment, thus increasing your portfolio size and value.
Stocks vs. Shares definition – What’s the difference?
Stocks are a general term for the investment, with shares being more specific on the actual company you’ve invested in.
They are essentially the same thing in today’s investment language and shouldn’t really be over analyzed.
Now we are clear on what is a stock, lets clarify one last related topic – the IPO.
What is an IPO?
An IPO (initial public offering) is the process of a company moving from being private (e.g. funded from private investors, family etc) to a publicly traded company on a stock exchange.
This change is a huge deal for the early private investors in the company. They get the opportunity to ‘cash in’ on their early commitment and realize the gains of their investment as the shares go public.
In recent years the term ‘IPO’ has become a buzzword in the tech industry, with companies ‘looking to IPO’ to make profits and capitalize on the media attention.
The Investing Hero advice for IPO’s? Steer clear. If you are chasing the next big IPO that’s fine, but don’t call it investing – it’s speculating, and the same as putting the money on the roulette wheel at a casino.
You are far better off staying the course and putting the money into your index fund.
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