Forgot your password?

Stocks: What Are They?

By Edited Nov 13, 2013 0 0

What are they?

Imagine you wanted to buy a stock of McDonald. They have 100,000 shares outstanding (this is an hypothetical example, so bear with me). In effect, what you are doing is buying 1/100,000 of the McDonald company. In a manner of looking at it, a bit of all their stoves, their burgers, veggies, stools restaurants belong to you.

You, in effect, have ownership of what is remained if you take all their assets minus by the debt they owe. A owner of a stock is known as a shareholder.

If they make a $1,000,000 profit, then what happens is you (who owe 0.001% of McDonald) made $10.00 in profit. The people at McDonald then decide how they would want to use that profit to serve their shareholders’ best interest. That is usually the case.

So, in buying the stock, you are in effect buying a bit of the business; its

McDonald Stocks: Owe A Bit of McDonald
assets, its employees and the business model. Keep that in mind when you are buying stocks, that it is not as risky as buying lottery ticket.

Buying stocks, is in essence, becoming a business owner where you evaluate the price of a stock, and determine if that is the price you are willing to part in exchange for that bit of business.

The Price?

What determines the price? There are many factors that determine the price of stocks, but ultimately, they determine the actions of investors. If you know about the concept of demand-and-supply, it would be helpful here.

In short, it is the investors who ultimately raise the price or lower the price of a particular stock. Should they think the stocks overpriced, and no one were to bid on it, then the price of the stock will fall until the price is perceived as lower or a fair price to pay for that bit of business (stock). Conversely, if they think there is more potential for growth and for the business to earn than what is reflected in the price of the stock, they will bid up the price until it matches what the investors collectively think the fair price is for that stock.

And very much like bargain, sometimes, a low priced stock with a strong underlying business, is the equivalent of authentic diamond sold on the cheap. However, not all cheap stocks are worth buying. Would you think it a bargain if you were sold a worthless pebble for a buck or two?



Add a new comment - No HTML
You must be logged in and verified to post a comment. Please log in or sign up to comment.

Explore InfoBarrel

Auto Business & Money Entertainment Environment Health History Home & Garden InfoBarrel University Lifestyle Sports Technology Travel & Places
© Copyright 2008 - 2016 by Hinzie Media Inc. Terms of Service Privacy Policy XML Sitemap

Follow IB Business & Money