Today I want to share with you what is a stock and how do you personally make money from it.
It's a straightforward and basic concept. If you're just getting started, you don't know what a stock is, and you don't see how the stock market works this is the post for you.
I want to give you a quick little insight into the whole process behind a stock and the stock market. Also, I want to show you how to make money as an investor.
Keep in mind that none of the trade examples here that we use our recommendations to buy or sell any stock or security. It's strictly for educational purposes.
This Is How Market Works
The way that the market works or the reason that these companies have stock is that they are looking to raise funding from investors. That's the whole point.
If you're looking to start a business, but you don't have any money where do you get that money?
Well, it's typically from other people and other investors. Here's what I do.
For example, I'm looking to start a business. Here's the total value of my company. What happens is half of this is my company. I'll say that the full value of this is $1,000.
If you're looking to sell a larger company, this could be $1,000,000 or $100,000. The value of it is irrelevant. Use this as a guideline.
Let's say I plan to keep 51% to be sure that I'm a controlling shareholder. So this would be you. You're starting the company, and this would be $500 worth of the company.
The next step is that you want to raise more money for:
- acquiring customer
- product development
To raise more money you might sell parts of your company. You're giving them a piece of that company. Here you have Joe who will get $200 worth of that company.
Then here you might have Sue that also gets $200 worth of the company. And then over here you got Bobby that gets $100 worth of the company.
Well, because Joe, Sue, and Bobby together make $500.
If you break this down on a share level or percentage basis this would be:
- Two shares - Joe
- Two shares - Sue
- One share - Bobby
- Five shares - you
Overall you have ten shares total. The whole company has only ten shares total that it has within that $1,000 value.
How Things Works From That Point?
Since the market is based on a last price sequence meaning as the value of those shares go up, your value of that investment also goes up.
Here initially we put in $500. Sue put in $200, Bobby put in $100, and Joe put in $200. These were our prices. And per share on a shared basis, you can see that per share it's $100. Two shares they had got $200. One share is $100.
This is our initial offer for our basic investors. Time moves forward, and the value of this company started to increase. That means that instead of $1,000 the value of the whole company might go up to $2,000.
Well, your shares increased to $1,000. Shares that Joe and Sue have grown to $400. And share that Bobby has risen to $200.
For example, if Bobby wanted to get out and he wants to sell his share the value of his share is $200. Maybe he said that he doesn't want to be an investor in this company anymore. He wants to get out and spend more time with his family or something like that. That is how things work.
That's how it works on the last price sequence. In the stock market as you sell your shares the value of that stock price either goes up or down.
The initial company gives out part of their company to raise money. That way they can use it for advertising, marketing material, they can build products or something else. They're using that money to grow the company, and that's ultimately how the baseline of it worked.
Great Real-Life Examples
If you look in the stock market of any company (Disney, Apple) out there, you have a lot of shares out there, and there are hundreds of millions of shares depending on the company.
Everybody has a piece of that company. There's a lot of people that have different pieces of that company. It's not 5 or 6 people that we discussed or talked about earlier.
There's a lot of people that have different fractions and different amounts of those shares.
In real life, you're taking a small little sliver. Let's say you have 100 or 200 shares. That way as the value of Disney, Apple or Amazon goes up then the value of each one of those shares goes up.
If you had 100 shares of Disney and the current price of Disney shares is $97,95. That means that you have to spend of $9,795 to acquire those 100 shares of Disney.
This is what you pay or invest in Disney to get 100 shares. Now the price of that stock can increase $2,05. That means that stock price goes up to $100. The value of the company went up to $2,05 from where you got in on it.
Everybody's getting in at different times. That's the whole thing. Some people are getting in earlier because they have more money to invest. Other people are getting in later because that's the time when they have some money.
Those hundred shares that you own are worth more by $2,05. All you need to do is multiply 100 by 2,05, and you make $205. It's pretty simple math.
The other approach that you could take is saying you have a hundred shares. Then you take these hundred shares and multiply it times $100 stock price. And now your value is $10,000. That's your value now of your shares.
Be Aware of The Value of Company
Nevertheless, that's how a company issues stock, and that's how you make money from investing in stocks.
A company issue stock because that way they can raise more money for a product enhancement, growing their customer base, for advertising and other things.
They're raising money for this, and you are giving them money in exchange for a piece or a little fraction of that company. As that value of that company grows so does the value of your piece of that company. And later you can sell it when you want to, and typically if you're trading a very public company, it's effortless to get in and out of the company.
You're getting a piece of that company whether you get 50 shares, ten shares or a 1000 shares 10,000 shares. It's all depending on how much money you have, on the value of the company and of that stock price.
And then eventually you're looking to sell it. If the company value drops, you're going to lose money, and you do the calculation in reverse.
I hope you learned how the stock market works. Remember that it's based on that last price sequence. And that's why stock prices constantly move up and down.
Because as a new person buys or trades or sells his shares or their shares now, that is the new price. That's how it works.
As it goes up twice or three times the value that's the new price. It's always moving and shifting around all the time.