Investopedia defines a stock (also known as equity) as a security that represents the ownership of a fraction of a corporation. This entitles the owner of the stock to a proportion of the corporation’s assets and profits equal to how much stock they own. Units of stock are called “shares.”
Got it! But what does that actually mean (just in case)?
A stock is a type of investment that represents a share of ownership in a company. When you own stock, you are called a shareholder. Initially, the price of the stock is formulated based on what the company is worth. First, the company’s value is established, then the value is divided by the number of shares that have been issued, which equals the cost for one share of the company’s stock.
Example: $1,000,000 (company’s value) divided by 10,000 (total shares issued) = $100 (cost for one share).
Good so far?
Once shares are initially sold to shareholders by the company, through what is called an Initial Public Offering (also referred to as an IPO), they are bought and traded on “exchanges” where supply and demand influence the price of the stock. You might recall when Facebook issued an IPO a few years back. This was the first time anyone outside of Facebook could participate in the potential growth associated with owning Facebook stock (FB as seen on exchanges).
Sometimes companies issue more shares of stock, increasing the total number available in circulation. Sometimes, they “buy-back” stock, decreasing the total number of stocks available. The former causes the per-share value to decrease (diluted), while the latter causes the per-share value to increase (scarcer, therefore more valuable).
Near S.E.E.D.’s headquarters was the birthplace of IBM, so let us use that as an example and assume you bought ten shares of IBM stock. How much of an ownership stake you have depends on how many shares of stock there are, in total, circulating out there in the wide world. If you own 10 and there are only 100 shares in total, owned by you and other people, you are a 10% owner of IBM. Make sense?
Now, just because you own shares of stock doesn’t mean you can walk into a building and start taking tables, chairs, or other assets that they own (would be fun if you could!) – there are legal definitions and limitations to ownership that is conferred by owning stock. What you can do is receive dividends if the company pays them, you can sell your stock, and you can vote in shareholder meetings. If you own a substantial amount of the outstanding shares of stock (often referred to as a majority position – think, Warren Buffett), you might have enough votes to impact decisions being made by the company.
For most of us who are not on Warren Buffet’s level, the real value in stock ownership is the idea that it increases in value, and you can later sell it for a profit, and/or you receive dividends while you own it. (More on dividends in a future article as well.) Neither dividends, nor an increase in the value of the per-share price is guaranteed; the value can decrease, or a company can go out of business altogether, in which case the investor could lose all of the money they made the initial purchase with.
Owning stocks can be one of the most exhilarating and exciting opportunities anyone can have, where you can literally take part in a company’s success, but it also comes with risks that you need to consider before taking action. Whether you already own stocks, or you are just getting started and would like to put some money to work, we are here to help. You can give our team a call at 607-217-5091 to schedule your initial discovery meeting with one of our fee-only planners (no commissions), and we can help you sort through your options.
S.E.E.D. Planning Group LLC (S.E.E.D.) is a Registered Investment Advisor (RIA) with the Securities Exchange Commission. S.E.E.D.’s team provides investment fiduciary and fee-only financial planning services to clients. Our fees are disclosed, easy to understand, and not predicated on product sales.
Andrea Vaioli is a Wealth Manager at S.E.E.D. Planning Group. In 2019, She earned the Behavioral Financial Advisor™ (BFA) designation from Kaplan University. This curriculum is designed to equip advisors with tools and training to help further their clients make sound financial decisions, maintain emotional competency, and achieve their financial goals.