Stocks Explained for Those Who Want to Be Rich!

Have you ever scrolled through social media

and seen people talking about “buying the dip”

or investing in Tesla, and wondered what exactly they are buying?

In this article, we dive into the world of stocks:

what they are, how they work,

and why people get so excited about them.

What Exactly is a Stock?

Simply put, a stock represents ownership in a company.

When you buy a stock, you literally own a tiny piece of that business.

• The Cake Analogy: Imagine your favorite company is a chocolate cake cut into millions of slices. Each slice is a “share.” When you buy a share, you are saying, “I’ll take that slice of the company.”
• Ownership: If a company was divided into 10 shares total and you owned five, you would own half that company. In reality, big companies have millions of shares, so you own a much smaller percentage, but the concept is the same.

Why Do Companies Sell Stocks?

Companies primarily sell stocks to raise money.

Creating and growing a business is expensive;

they might need cash to build factories, develop products, or pay bills.

• Avoiding Debt: Instead of borrowing money from a bank (which they have to pay back with interest), they sell shares. The money they get from selling these shares doesn’t need to be paid back; it is theirs to keep and use.

How It Works: The Story of Fresh Kicks

To understand the process, let’s look at a hypothetical example.

Maya wants to open “Fresh Kicks,” a sneaker store,

but needs $100,000. She only has $50,000.

1. Splitting the Business: Maya divides her business into 10 equal shares. She keeps 5 shares (her $50,000 investment) and sells the other 5 shares for $10,000 each.
2. The Investor: Jordan buys one share for $10,000. He now owns 10% of Fresh Kicks.
3. Success Scenario: Five years later, the business is worth $300,000. Jordan’s 10% ownership is now worth $30,000. If he sells, he makes a $20,000 profit.
4. Failure Scenario: If the business struggles and drops to a value of $80,000, Jordan’s share is only worth $8,000, meaning he lost $2,000.

Types of Stocks: Common vs. Preferred

Not all stocks are created equal.

They typically come in two main “flavors.”

1. Common Stock

This is what most people think of when they hear “stocks.”

• Voting Rights: You can vote on important company decisions (1 share = 1 vote).
• Growth Potential: These typically have the highest potential for growth. If the company does well, values can skyrocket.
• Risk: If the company goes bankrupt, common stockholders are last in line to get paid. Dividends are not guaranteed.

2. Preferred Stock

Think of this as the “responsible older sibling” of common stock.

• No Voting Rights: You generally don’t get a say in company decisions.
• Guaranteed Dividends: You get paid dividends before common stockholders, and these payments are usually fixed and reliable.
• Lower Risk: If the company goes bankrupt, you stand in line ahead of common stockholders (but behind debt collectors).

Why Invest in Stocks?

Why put hard-earned money into stocks

when you could keep it safe in a bank?

• Potential Growth: While a bank might give you 1-2% interest annually, stocks have historically returned around 7-10% per year on average over the long term.
• Dividends: Some companies share their profits directly with shareholders through dividends, which is like getting a slice of the profits just for being an owner.

Summary

When you buy a stock, you aren’t just buying a random thing

that goes up and down in price;

you are buying actual ownership in a real business.

Whether you choose common stocks for growth

or preferred stocks for reliable income,

investing offers a way to potentially grow your wealth significantly

more than a standard savings account.

Remember to start with companies you understand

and never put all your eggs in one basket.