Stock Basics for Dummies
In what was the biggest technology deal in history, Dell agreed to purchase EMC Corp. for $67 billion. While there are only a few companies that are capable of executing a complicated deal like this one, for a much smaller price, anyone can actually purchase their own piece of a company, albeit a smaller share of a company, by investing in a company’s stock. Stock investing, whether done on your own or on your behalf, should have a place in everyone’s life as a chance to increase one’s wealth. However, with anything else in life that is worth your time, research and knowledge are of the utmost importance. This article will give the reader some basic terminology and knowledge of the stock markets, and will provide examples with well-known companies.
What is a stock? Simply put, it represents an ownership or a share in a company; just like a typical ownership position, you are entitled to a company’s assets and profits. There are two main types of stock: preferred and common. Although it might seem as though preferred stock is “preferred,” that is certainly not always the case. Preferred is only “preferred” for the main reason that in case of a company’s bankruptcy its owners have a higher priority to any leftovers over common stockholders, and periodically, almost every company will distribute a stream of fixed payments, called dividends. On the flip side, the relative predictability and safety of preferred stock makes it less prone to the vicissitudes of the market, causing it to often lag behind its counterpart’s appreciation. Not all companies have both types of stocks, but almost all with have common.
The more stock that one has, the greater ownership that he/she posses--owning two slices of a pizza obviously represents a larger share of the overall pie than just one slice. The total number of shares of a company multiplied by its stock price gives you to its market capitalization. This is what the company is worth in the public’s eyes, i.e. the whole pizza pie. This, however, is not necessarily its “real” and inherent value, i.e. I can buy a potato chip for $100, which is clearly overpaying. Apple has a stock price of $111.79 and 5.7 billion shares outstanding (shares that are owned outside of the company) bringing it to a world-leading market capitalization of $637.5 billion (as of this writing). As of October 13, 2015, one share of Microsoft was worth $46.89, which represents a 1/8.03 billionth ownership in the company. However small that may seem, 10 years ago that same share was about $25 cheaper. You can do the math, but if you would have purchased 100 shares back then, you could buy plenty of Zeide’s Nuggets at Golan Heights today.
You may have used a service such as Uber or Instacart recently, had a great experience, and and now want to invest in the company. Unfortunately, some companies like Uber and Instacart are private, meaning they’re not publicly traded consequently cannot be purchased by everyday investors. Microsoft on the other hand is a public company and its shares can therefore be purchased. In theory, if you buy a share in Microsoft, you now have a claim on Bill Gates’ old desk, have a say in who is elected CEO, and all while not incurring the same liabilities as privately-held Uber’s executives. Some of the greatest investors think within this framework- because even they can get lost in the trees and not see the forest. They see every dollar as an investment in a company. They picture themselves sitting besides Bill Gates’ desk as opposed to a stock-purchase certificate on the computer. In fact, the only risk that you possess is losing any money you invested. This may seem far-fetched, but it has happened on occasion, mostly due to corporate scandals or exorbitant debt requirements. To illustrate, former investment banking behemoth Lehman Brothers was sitting atop the financial world with a top-five ranking in worldwide investment banks. At one point in 2007 it was trading at $86.18 per share, giving it a market capitalization close to $60 billion. Amidst insurmountable financial obligations, its share price plummeted to $3.65, ultimately causing its sudden purchase by Barclays for a fraction of the price. Someone who was still invested in the company when its price plummeted would have lost a lot of money.
As touched on earlier, some companies are private, like Uber and Dell, and are thus inaccessible to the general public, while others like Microsoft, McDonalds and Nike are, mainly through exchanges. Simply, an exchange is an interface that brings together buyers and sellers within the general stock market. The exchange can either be a physical location, with the most famous being the New York Stock Exchange, otherwise known as NYSE or the “big board”, or a virtual one, where trades can be executed electronically, most famously through the NASDAQ. Additionally, an exchange can be anywhere across the world- anywhere from the Chicago, Frankfurt, Sydney, to Tel Aviv. For the most part, trades can only be executed on that respective exchange during set hours. The New York Stock Exchange trades from 9:30am to 4:00pm on a regular day and is closed for Shabbos, Sunday and some holidays.
Now that you know a little about stocks, the obvious question is what causes them to go up sometimes, and unfortunately for investors plummet at other times? At the core, supply and demand is the catalyst--if a company is in higher demand than it is supplied, it will go up, and the reverse applies. It is for that reason that stock prices are constantly changing, as people want things at different times. That part is simple. The harder part is determining the stimuli behind the many decisions of the participants of the market. Until today, no one has mastered this. There are many theories, some of which have even won Nobel Prizes. The consensus is that the amount that the company earns is a major factor, since no investment is worthwhile if it doesn't make money. But, there are also more outlandish theories, such as the “Super Bowl Indicator,” where overall prices are determined by the conference of the winning football team. At the end of the day, it is important to remember that investing is an art and not a science, and that no one is yet to master the trade. It is said, that the best stockers correctly pick a stock 51% of the time. Where else do you have an opportunity to be wrong 49% of the time and still succeed?