To most people, the stock market can seem like a never ending labyrinth of do’s and dont’s. It can be overwhelming to say the least. The intention in this blog is to help the average person gain a small understanding of what a company stock is.
A stock is a fraction of ownership of a company. A company will have a certain value based on all the things it owns and the income that it generates. Any income a company produces above the cost of running that company is profit. When you own the stock, you own the right to a portion of that profit. You share in both the success and the failure of that company, which is why most stockholders are also known as shareholders. It is important to remember that a stock is only the smallest fraction of the overall company.
Walmart for example has roughly 3.2 billion shares available. Around 31% of the shares, nearly 1 billion shares by itself, are institutional holdings, which means that they are shares which are held by the owners of the company. At the time I’m writing this, Walmart stocks are trading right around $88 per stock. If you spent $88 and bought one share of Walmart, you would have a one/3.2 billionth’s ownership right or 0.0000000003125% of the company.
One of the other important things investors should know about a stock is that the ownership of the stock limits their liability in the company’s overall loss. If you buy stock for a hundred dollars, you can not lose more than a hundred dollars even if the company loses more money than what their total shares are worth.
Stocks were originally valuated based off the dividends they were or would be paying and the time value of money. Dividends are money paid to the shareholder based off the profit of the company. The time value of money is simply an idea that money today is worth more than it is worth in the future. In other words, things get more expensive as time goes along. A person could buy a lot more with the hundred dollars in 1980 than they could by today. In terms of putting a value to a stock, this method simply states that the current value of a stock is worth the current value of all the dividends that will be paid.
Currently, depending on what you’re reading and who you’re talking to, there can be anywhere from 10 to 20 ways to valuate a stock, including four or five ways to get an approximate value. This all depends on the approach you might want to take.
It is important to note that stocks pretty much hang out in exchanges. So if you’re hunting for one, this is where you would look. Exchanges are heavily regulated markets in which stocks are exchanged. The two largest are based in the United States, the NYSE and the NASDQ. There are stock exchanges located in many countries.
By: Financial Platypus