WHEN I started this column, I made a promise to demystify the very confusing world of investing.
Today’s article is one of the key pieces in that process. It’s dedicated to simplifying and explaining one of the basic elements of investing. One that everyone talks about but not everyone really knows.
I’ve found that many beginners often want to ask this question, but are often uncomfortable about it and don’t want to look stupid or feel judged. Instead, they nod and smile when other people mention “stocks” or “IPO”, but they really don’t know. So, here’s the explanation, as straightforward and simple as I can make it.
A “stock” is the single, smallest unit of ownership in a company.
Boom! That’s it. Now you know. Of course, like most things, there are details that can complicate matters, but that simple definition is correct and once you understand that, you know what stocks are. Stocks also have multiple names that are used interchangeably. They’re often called “shares”, “equities”, “ownership units”, among other names.
Different names, but they all refer to the same thing, units of ownership of a company.
There are different types of shares, and I’ll tell you about the other two most popular ones later on. For now, when I say “shares/stocks” I mean the first, most popular type, aka “common/regular/ordinary shares”.
All companies have shares, even companies not listed on a stock exchange. Once you own stocks/shares in a company, you own a piece of the company and are a shareholder/stockholder.
Each share gives you the right to a percentage of the total company and one vote at company shareholder meetings. Now let me give you a few of those “complicating details”.
I mentioned earlier and simplify them using an example.
Think of a company (any company), as a loaf of sliced bread. Let’s say that the loaf of sliced bread has about 20 slices. The loaf of bread is really made up of all 20 of these slices put together (including the ‘bread back’, even if you don’t eat it). In the same way, a company’s ownership is made up of all the stock units it has (there’s no bread back in stocks though…fortunately or unfortunately).
Now, since each ordinary stock/share represents one unit of company ownership, it stands to reason that multiple people can own pieces of a company, in much the same way that multiple people can get slices of bread from the loaf.
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