In its simplest term, a stock is a partial ownership in a corporation. If a company has 100 shares of stock outstanding and you own one share of stock in that company, then you own 1% of that company. Owning stocks is like owning a business....there is no guarantee that you will make money and there is a chance that you can lose all of it.

Companies issue stock when they want to grow and don't want to have to go into debt. Since stock equals ownership, the corporation has no obligation to pay back the stockholder. The reason why investors buy stocks is in hopes that the earnings of the company will increase, thus increasing the value of the stock.

In addition to the increase in value, some stocks pay out what is called dividends. Every quarter, companies determine how much money they made. They either reinvest these earnings back into the company or they pay out dividends to each stockholder.

Most companies do some of each. For example, let's assume you bought a stock for $10 and the company earned 25 cents per share in its first quarter. Since the company would like to continue to grow, it puts 20 cents per share back into company operations and pays out a 5 cent dividend on each share. This means that you will receive 5 cents that quarter since you own one share. If you owned 10,000 shares, you would get $500 as dividends. This is like extra income and is taxed as income.

This is an AT&T stock certificate from the 1970's. These days, investors don't receive these certificates, instead, the broker keeps track of all their holdings. However, there used to be a day when investors would need these to prove that they owned the shares.

How it All Works

We live in a capitalistic society. This means that if you want to open a business, the government doesn't get involved. (Except for a few circumstances such as environmental issues, discrimination, etc.) A business owner opens their business because they believe they can profit from it. Investors are those who believe what the business owner believes and they want to make money together.

If we didn't have investors, a lot of the technology around us would not exist. People invent great products, but without investors, most products, no matter how great they are, cannot succeed.

One important thing to understand is the distinction between investing and speculating. Speculating is essentially a form of gambling. One speculates when they bet all their money on a poker hand, not knowing what the other players have. They want to make a quick buck. Although some investors can make large sums of money in a relatively short time, investors tend to be in it for the long haul, expecting to make money over the years. Don't get me wrong, speculation is neither a good thing or bad thing. It helps the liquidity of stocks but it also forces the investor into taking a much higher risk.

Investing is a win-win situation..... It benefits everyone. Investors generally make a profit in the long term while civilians get new products and technologies.