What is a Stock?

So what exactly is a stock? Basically, a stock represents ownership in a business. When you purchase a stock you own a percentage of that business. You own a share of that company. So when someone says they own 100 shares of a stock, they own 100 ownership units in that company that will represent some percentage of ownership.

People buy stocks because they believe the stock price will go up over time.

There are many reasons people own shares of stock in a particular company. Maybe a company comes out with something revolutionary, or they merge with another company, or there is a slow steady acceptance of their product or service. Bottom line is people invest in stock because they believe that over time, the price of those shares will rise.

How do people make money by owning stocks?

Stocks, which are sometimes called equities, go up and down in price based on the supply and demand for the stock of that particular company. A company that keeps earning more money each year, theoretically makes the shares of that company worth more as time goes on.

Let’s use Apple as a good example of how a stock can go up in price.

For years Apple’s stock was a laggard. It seemed to have lost the war to Microsoft when it came to selling personal computers. But Apple started gaining interest in investors’ eyes when it came out with the I-pod in the early 2000’s and added I-tunes a couple of years later. The stock rose a bit.

But when the I-phone made its debut, everything changed.

The company started selling the the I-phone in June 2007 when the price of Apple’s stock was around $17 per share (adjusted for stock splits). Most everyone knows that Apple’s I-phone became one of the great success stories in business history. It literally changed the way people communicated.

As more and more people bought the I-phone, Apple’s profits soared. Apple’s stock price soared along with its rising profits from the I-phone. By June of 2012, the stock price had risen to around $95 per share or about 5.6 times that 2007 price of about $17.

For those 5 years investors seemed to have an insatiable appetite to own a piece of this company. The revolutionary I-phone quickly created a rising profit picture which in turn caused a huge demand to own Apple’s stock and far outweighed those who wanted to sell the stock.

The simple equation is that when you have more people wanting to buy something and fewer people wanting to sell, the price of anything goes up. And that’s exactly what happened to Apple between 2007 and 2012.

The same type of thing thing happened to Pfizer when it came out with drugs in the 1980s and 1990s such as Lipitor, Zoloft and Viagra.

There are many reasons a stock’s price can rise, so the big question is, “Do you always make money in owning a stock of a single company?” The answer is NO. You can lose money when investing in any one stock. And always remember that past performance does not guarantee future results. Things can, and do, change.

But we will look at the downside of owning a single company in our next edition of “Investing Basics for Savvy Women.”

Until then, Savvy up!!!

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