Wednesday, September 12, 2007

Finances: How Stocks Work

Ok, what are stocks? Well, coompanies normally start off being privately owned. However, if the company needs money to grow, one option they can choose to do is sell a part of thier company to the public. This is what it means when it is said that a company is "going public". When the public buys parts of the company, they are buying stocks. So stocks represents part ownership in a company.

The price of a stock represents the perceived value of the company. The more good news about a company, the higher the stock price rises. Some stock prices pay dividends. Dividends are a share of the profit of the company given as cash to the stock holder. Dividends are great for stocks that don't rise very much.

When you buy stock, you buy shares. The stock price is the value of one share of the company, hence the word shares. For example, if the stock price for a company is $10, then 10 shares would cost you 10 x $10 = $100. Now if the stock price went up a dollar while you have it, then your shares are worth 10 x $11 = $110. You've made $10! How about that?

That is the basic idea of how the stock market works. As you can see a change in price can mean big gains or big losses. Do your research on companies before investing in them.

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