The Basics: What is a stock, how do they work, and why should I own them?
Jumping back into my stock trading explanations for new investors, today we will be talking about stocks.
Firstly what is a stock? Here is a simple definition I pulled from Wikipedia: "A single share of the stock means fractional ownership of the corporation in proportion to the total number of shares." This means that by owing a stock, you own a small amount of that company. This is why choosing good companies to invest in is extremely important. Stocks work by holding value, based on the profits of a company. The share price is a reflection of everything the company is doing.
Let's say you bought a share of Tesla and a share of Nikola five years ago. Now Tesla has done extremely well over the past five years. It has continued to grow its revenue numbers, as well as expanded what the company creates. This has shown in the share price as it has multiplied many times over. Because the company performed well, and people say potential with electric vehicles, the company has made the shareholders an amazing profit. Now let's take a look at Nikola. This is another popular electric vehicle stock, but it has not been performing well. It put out some PR news and people found out that the company actually was faking their vehicles abilities to drive. While only showing the cars driving downhill to hide that fact that they were unable to move on their own. Once shareholders found this out, the share price dropped heavily.
Nikola was not only lying to their shareholders about what their company was doing, but also the general public. This made them known as being untrustworthily. Consumers don't like to buy products or stocks of companies that aren't trustworthy. Nikola has tried to fix their reputation but many won't consider buying products from them, or their stocks because of the past.
When looking into a stock it is extremely important to know about a companies history. Just because people online, or even your friends and family say one specific stock is amazing and will do well, doesn't mean you should drop money into it! While they may not be wrong, it is always important to do your own research! I have a number of videos doing research on my YouTube channel if you are interested.
Lastly, the reason for buying stocks. This is extremely important to understand as it is an easy way to make a lot of money over a long period of time. People buy stocks because the stock market has a history of growth. It doesn't always go up, but in it's history, its gone up much more than it has gone down. People invest because over different time spans, the stock market typically makes money. Now the past of the stock market doesn't reveal the future, but knowing that it has historically increased makes investing seem like a no brainer! People invest because it grows their money. How well? That depends on your investing type which will be talked about in another post! Hopefully this answered some of your questions. More to follow on investing as well as some book reviews coming soon! Thanks for reading and I hope this information benefitted you!
Here is a photo of Nikola's truck, it actually looks pretty good in my opinion!