Stock Definition
Some of you already deal with stocks. Most of you heard about it. It’s something you can buy or sell in the stock market. But what are the properties or what is the definition of a stock before
knowing the inherent
risks of stocks?
In short: When you buy a stock you buy a small share of a company. Thus, you become a participator or copartner of the company which you bought the stock on.
Assume your friends want to found a company X and you decide to participate in this newly founded company. Let’s say the overall sum of the invested capital (venture capital) amounts to 10.000$. You want to put 2500$ into the company. Therefore, your share of the company is 25%.
The difference between the share you have now and a share you buy in the stock market is that the latter, called stock is tradable. So, if you want to sell your 25% stake in X you need to find a buyer. But this can take a long time whereas selling a stock in the stock market can be done within seconds.
Company X has also the possibility to enter the stock market (primary offering or new issue), but certain requirements are needed to get this permission, e.g. a certain amount of turnover and at this early stage of X it is not possible as the needed prerequisites are too far away.
And now imagine that X’s turnover/sales are higher than its realized costs. In this (simplified) case X is generating income or profits. Its profits constitute a sum of 1000$ after taxes. Quite logically, if you and your friends decided not to retain this money within the company but to spill it out you would get 25% of it or 250$. This distributed profit is expressed in financial terms as a dividend.
Generally, when you buy good and solid stocks you will also get a dividend which is put in percentage of the current stock price. If you get a 5% dividend and the stock price is 30$ you would get 1.5$ per year and per stock. |
