Quick Take: What Are Stocks?

Paul Atherton |
22-04-2021
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Before you dip your feet into investing, you should become familiar with the basics.

Listen to this advice as a podcast

At its basic level, a stock is a small piece of ownership in a company.

On Wall Street, they call it equity. When you own stock, you own equity in the company. A trading desk that trades stocks is called an equity desk.

Stock = equity.

If you own 100 shares of Apple Corporation, you own 100 shares of a limited number of shares that Apple has issued to the public. The number of outstanding shares for Apple is pretty significant. As of December 2020, there were 17.11 billion outstanding shares.

If the company does well, then the company’s entire stock value is worth more, and your piece, however small, is worth more.

When a company becomes more profitable, all equity owners, whether they have 100 million or 100 shares, become richer.

When an individual purchases a stock, they are investing.

When a company sells stock, it is raising money to gain revenue to build, invest, and grow the company.

What does it mean when a stock goes up or down?

The price of a stock will go up and down based on two main factors:

  1. It’s current earnings.
  2. Expected future earnings.

You might have a company, for example, Amazon, that might be losing money currently, but it’s growing so fast that expected future earnings are substantial. This actually happened some years back.

Amazon may had been losing money, but they also had a high price to earnings ratio.

The higher the price to earnings ratio, the higher the expectation is that the company will have high future growth rates.

The price to earnings ratio might be the single most crucial measure to consider when buying a stock.

Then you should ask yourself, does this correctly reflect the company’s value, or would I expect that future earnings might be even bigger?

Think about Apple before the iPhone or before Steve Jobs returned.

You can bet that the future earnings ended up much larger than the price to earnings ratio was at the time.

How can you buy stock?

There are several ways to buy stocks.

You buy stock on the stock exchange. There are several trading platforms where you can purchase stock.

You can buy stock from an online account (you would have to set up a brokerage account). You could buy them through a bank (again, you would have to set up an account) or buy the stock through a broker.

For first time investors, I would encourage the use of the bank. Set up an account through a bank. If you’re internet or computer savvy, you can do it through an online account. Still, I would get some guidance from a trusted person with experience.

Stocks vs Property

For most Australians, owning property is the most important thing in their life.

And I get it.

We all have to live somewhere. And if that somewhere we are living goes up in value, then all the better for it.

However, when it comes to making money by investing in stocks vs investing in property. With few exceptions, stocks nearly always win that argument.

Think of Amazon. If you bought that stock initially when they first went to market, you would now be sitting on 120,000% of gains. No investment property will go up by that much.

The reason for this is that companies are ‘living things’—they change dramatically over time. They add products and services. They invest and invent.

Again, think of Amazon. When they started, they only sold books. Now? They sell nearly everything to nearly every corner of the world.

An investment property? Well, you may have added an extension. But probably not, because, well, it is an investment property.

So, comparatively, stocks are the way to go.

When it comes to stocks, remember…

  1. Stock is also called equity.
  2. When you own a stock, you own equity in a company.
  3. Stock prices go up and down based on current & projected earnings.
  4. A high price to earnings ratio indicates that a company is expected to do well in the future.
  5. First time investors should consider investing through a bank.
  6. Investing through stocks have a better return than investing through property.

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This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.

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Who is Paul Atherton, That Wall Street Guy?

An ex-Wall Street advisor who worked with major players in the global financial industry for over 30 years, Paul’s mission is to help regular people reclaim their wealth and financial security.

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