Stocks
Young Fools
March 25, 1998

What is Stock?

A share of stock is a share in a company. If you own 100 shares of the Acme Lead Balloon Company, and Acme has issued 1,000 shares of stock, then you own a tenth of the company! (A math mini-lesson, for those of you who need it: 100 divided by 1,000 equals 1/10 or 0.10 or 10%.) As a shareholder, you will share in the company's success and its failures. You even get to vote when the company has to make a big decision.

Think about it this way -- if you have $100 to invest, you could put it in the bank and earn a low interest rate. Or you could buy 100 lottery tickets and probably lose all the money. Or you could buy part of a company. You can own a part of Sears, Apple, Disney, Coca-Cola, The Gap, Toys 'R' Us, Exxon, Ben and Jerry's, AT&T, Xerox, Ford, or many other companies. In fact, there are thousands of companies with shares you can buy.

So, if you buy a share of IBM, and IBM keeps doing really well, making more and more money, the value of your share will increase. Maybe you bought one share of IBM last year for $100. In four years, the share might be worth $200. That means you doubled your money and made $100. Not bad, eh? If you had put that $100 in a savings account earning 5% per year, it would only have grown to $121.55. You would have made $21.55, not $100. But by owning IBM, in this example, you earned roughly 18% per year, a lot more than the bank's 5%. What a difference!

What's the catch? It's risk. Remember -- a bank promises you a rate of interest. Maybe it's 5%, maybe it's 2%, or maybe it's 8%. Whatever it is, you can be sure you'll get it. But IBM isn't promising anything. Of course, the company will be trying to make more and more money. It wants to increase the value of its shares -- after all, most of its executives probably also own shares, like you. But there's always a chance that the share price will drop. Maybe you bought IBM at $100, but now it's down to $80. If you sold your share now, you would lose $20 (plus some commission costs).

Investing in stocks is a bit risky. Should you avoid buying stock, then, if you're nervous? Well, you should certainly wait until you're not nervous. Being nervous means you probably haven't learned enough about investing and stocks. Once you learn enough, though, you'll see that there are a bunch of ways you can lower the risk. And ways that you can pick great companies, and not so-so ones -- ways that most Americans don't know about. Many Americans are so afraid of stocks that they won't buy them on their own.

Stocks

What is Stock?
The Case for Stocks
Stock Prices and Value
How Do Stocks Move?
Dividends
What are Mutual Funds?
What are Index Funds?
Stock Splits