What Is A Stock?
When you hear about investing, what comes to your mind? To most people, thoughts of intricate math or complex decision-making might pop into their heads, almost like investing is some difficult, time-consuming endeavor akin to practicing law or medicine or advanced mathematics. I’m here to tell you that not only does it not have to be that way, it’s actually, deep down, really not that way unless you want it to be. At its core, investing is founded on one, solid fundamental principle: buying a small piece of a company at a discount to its intrinsic value.
As you might rightfully point out, there are actually countless (not really, but it seems that way) types of investments you can buy or sell in order to make money in the market, but the single most important one of these is undoubtedly the stock, or common share, so let’s start there and leave the rest for another time. When a company is growing, it needs money in order to grow more rapidly. Some companies borrow this cash, others generate it themselves through their profits. A different option, though, is for them to issue shares in themselves. In essence, what happens here is that the owners of the company will decide to allow some percent of the business to be owned by anybody in the public who has the money to buy in.
An example of this might be where a random company decides to allow outsiders to buy 10% of the business. They will then issue a certain number of these shares at a specific price they believe to be representative of the value of the overall company. If current owners believe that their company is worth $1 billion, as an example, they might decide to make available 100 million shares. 10 million of these (100 million x 10%) would be available to the public with an implied price of $10 (10 million x $10 = $100 million, while the remaining 90% of the company owned internally would be 90 million x $10 = $900 million). The business has now succeeded in raising $100 million from outside investors and it can use that cash to grow the firm accordingly.
Buying up a piece of a company, even a small piece, can go on to be worth a great deal of money over the long run. The Coca-Cola Company, one of the world’s most beloved brands, issued shares to the public for the first time in 1919. Had you acquired even one share of the business at the $40 issuance price, your total investment by 2012 would have grown to $9.8 million. Most of this upside would have been driven by the fact that management, like the management teams of most successful companies, decided to pay out to shareholders a small cash bonus of sorts (known as a dividend) a few times each year that came from profits generated by the business and given you the opportunity to use that cash to buy up more shares in the business.
One simple truth is that anybody with a little bit of money can invest in the market, but even if you don’t have money today, that doesn’t stop you from practicing in the market and receiving a rare opportunity to win some cash in the process. Starting soon, our company, Echo Investing, will be launching a completely free app that will allow those who sign up to invest with $10,000 in fake money. Our app is packed with fun and exciting tools and data for users and the best part is that the person whose portfolio generates the best performance every week will receive a cash prize. In time, we will be rolling out unique features that aim to turn investing into a collaborative, fun, and social experience, with the ultimate goal of allowing our users the ability to trade with real money! In the meantime, though, sign up for our waitlist and follow us on social media, and in the next couple of weeks you can expect an invite for the experience of a lifetime!