WORK IN PROGRESS
The best way to learn is to teach, so hear goes nothing. Here is how to invest.
I don't know anything about investing or the stock market. I am literally researching while writing this with extremely little prior knowledge. This is not advise and with any luck just a new inverse-Crammer-effect. But this time the inverse-Tague-effect
What is Stock
Stocks represent a portion of a companies value. Ultimately however, a stock is a "foogazy, fogasy, it's a wazzy, it's a woosy, its fairy dust, it doesn't exist."
An Ice Cream Example
Say an ice cream store has been started. They don't have much capital to employ for a stand, freezers, product, advertising, employees, or other things they may need. To remedy this, they collect money from some friends, family, and peers. In exchange for this money, all their new investors now own a small portion of the ice cream shop. The shop gives them a small amount of the profits each month, and they have a small amount of decision making power at the company. And because of these new investments, the ice cream store has some capital to start and expand the business.
If an investor, lets say Warren, thinks the shop will do well in the future but wasn't able to buy some of the initial share offerings, they could buy shares from someone who got some at the initial offering, lets say Charlie. If Charlie bought his share for $10 initially, he may sell them to Warren for $15 now and make a $5 profit.
In this case, Charlie is would prefer to make $5 than to have the benefits of owning the stock, which are:
- Receiving dividends. Charlie will no longer receive any of the ice cream shops profits.
- Decision power at the company. Charlie now has zero decision power at the company, and is now in a worse position to outright buy the ice cream shop if he wanted
One last benefit that Charlie would consider, is that Warren might want dividends or decision power very badly. Badly enough that he would spend $20 on the stock.
The final benefit to owning a stock, the benefit that turns this into a foogazy and a fogasy, is that people might want to spend even more on it than they do now in the future. The demand may increase.
The Bare Bones of Stock
Stocks represent a portion of a company, and people want to own them because:
- They pay dividends (sometimes)
- They give decision power over the company (sometimes, and only if you own enough of them)
- They could sell them for a higher price in the future
They could sell them for a higher price in the future is really a second order effect of the prior reasons, but much more important in practice.
Companies want the price to be higher because:
- It makes a hostile takeover more difficult
- Only people serious about the company will accumulate decision power
- They could justify a higher price in an additional offering
- The company is made of people who have people motivations
The CEO's pay is often tied to the stock price, so their incentive will be to make the stock price increase, because:
- They will get paid more
- If they don't investors will put their money else where, thus lowering the price further when they pull out
- If investors have decision power, they will replace the CEO with someone who will make the price increase