Block 3: Where Do We Start?
Investing seems intimidating but just like any big problem, when you break it down into a lot of tiny pieces, it becomes simpler. Granted, there is some jargon involved just like anything else (see glossary), but that is why we are here.
To start, let’s make sure we have a firm foundation on what stocks actually are.
Take, for example, the most valuable company on Earth: Apple. You might have heard of it. You might also have heard your haughty neighbor brag about owning stock in Apple. So what exactly does this mean? Put simply, stocks are the vehicle by which public companies can be bought and sold.
Ok, even that definition requires explaining. Vehicle? Like a car? The other vehicle. More like a medium of exchange. For instance, if you have ever traded baseball cards or another type of card (maybe Pokemon?) this might make more sense. The baseball card would be to the stock as the baseball player would be to the business. The card is just a medium of exchange, or vehicle, by which the baseball player can be bought and sold. That’s where the analogy ends; if you own a baseball card you don’t actually own that human being. Whereas, when you buy Apple stock, you are effectively buying into Apple as a business. Don’t miss this: stocks represent ownership of a business.
But what about the ‘public’ companies part? What does that mean in this context? Public companies are businesses that can be bought and sold by the public. Incredible definition huh? All that means is you don’t need any fancy relationships with really rich people or royal blood, you just need a brokerage account.
A brokerage account is to stocks as groceries are to a grocery store. If you want groceries you buy them at a store. If you want stocks you buy them by opening a brokerage account. On the other hand, there are also private companies. The public cannot buy them because they do not have stocks associated with them. For instance, I can’t buy into your Uncle Ned’s landscaping business or that Mom & Pop diner down the street from you. Why? Because those businesses are not publicly traded. How does a business become ‘publicly traded?’ Let’s find out…