What exactly happens when you buy stocks?
Question:
Answer:
If you invest $50 in the stock of a company, you become part owner in that company--a very small part. If the earnings and prospects of the company improve over time, the company becomes worth more money in which you share. Not all companies have improved earnings and prospects. Many in fact fail and the company becomes worthless. A standard measure of whether the company is prospering is the earnings per share of the company. If you look at the income statement of the company and compare it to previous years, you should see that the earnings per share are increasing each year. Sometimes they do not. If they do, the value place on a share of stock in general will increase as people think the stock is worth more money. Some companies pay dividends. When their earnings increase, they raise the amount of dividends that the owner of the stock receives. That also makes the value of the stock worth more money.
Not all companies pay dividends, many prefer to give the money to their CEO instead. These companies in gereneral are to be avoided.
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The $50 goes to the person/company who owned the stock before you did.
If you pick the right stock, the market value of your stock goes up.
When you sell the stock to someone else, you make a profit.
On the other hand, if the market value goes down, you'd lose money if you sold.
When you buy Stocks you are investing in the growth of a Publicly Traded Corporation and become a part owner of that company and the percentage of your ownership depends on the size of your Stock Purchase.
When you buy an individual stock, you are buying a small piece of the company in the hope that your share will increase in value and/or pay you dividends from the company's profits. When you receive dividends you usually have the option of reinvesting that money in more stock, or you can keep it and invest it somewhere else.
Today's price of the stock is only slightly connected to the company's actual cash value; instead it's the price other buyers are willing to pay for your share, based on their perception of the company's value. As time goes by and the company grows larger and more profitable, the market value of your shares goes up. But you don't actually have that money until you cash out and will lose money if you sell your shares for less than you paid for them.
In the case of mutual funds, you are pooling your money with other investors and hiring the manager of the fund to invest and reinvest that money in a blend of stocks. The manager chooses the stocks and buys, sells, and collects dividends to put back into the fund (then skims a little off the top). The cash value of your share of the fund changes with the market value of the stocks the fund owns, and is subject to the same risks as other investments. Again, you don't actually have that money until you cash out.
your money goes away and it may come back when you sell it.
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