What is a Stock?

Before going deeper into what is a stock, it is important to understand the basic differences between a company that is still private versus one that is public.

A company has two ways of getting financed (besides loans): either by private investors or by public investors.

Why would an owner of a company want to sell part of the business?

The answer to this is pretty simple actually… to grow the company faster.

Picture this, a successful startup had initial success and wants to expand to 8 other countries. No matter how good their product is, if they decide to grow on their own, they have no option than to:

a) Be patient and grow slow and steady

b) Ask for a loan and pay for interest rates (not the best option but sometimes the only one available)

c) Get private investors by selling a percentage of the company

d) Go public and sell a percentage of the company to public investors

So, what is a stock?

A stock is a % of a company acquired by an individual (also known as a shareholder).

Either private or public companies can issue stocks and have their own shareholders, but only the public ones are available on the most known stock exchanges (keep reading to understand what a stock exchange is).

stocks
Hypothetical example of a company XPTO who sold 30% of its ownership in order to grow

Stock Market

For a company to go public and be available on the stock market for common investors, it first needs to do an Initial Public Offering.

This process changes the status of a company from private to public.

It’s hard for average investors (like me) to have the chance to buy shares in this initial phase. Usually, only big names have access to this kind of offers in what is called the Primary market.

The rest of us only have access to the shares in the (stock exchange) secondary market through our brokers.

Stock Exchanges

You have probably heard about the New York Stock Exchange (NYSE) or about NASDAQ (there are much more known ones though).

They basically serve as markets that sell stocks. They hold different fees to buy or a sell a stock within themselves.

Different stock exchanges can sell shares from the same company, however this rarely happens.

Brokers

Brokers are the “bridges” that connect investors to the stock exchanges. Nowadays, there are a lot of certified brokers. I currently use Degiro but I’d gladly hear your opinion on another one that you think might be better.

Financial Statements

Each quarter a company has to issue its balance sheet. You don’t have to fully understand them but should at least have a basic idea from it.

I use to take sneak peeks in Yahoo Finance (see Apple example).

The announcements moment can be an important one, in case a company overcomes the results either positively or negatively.

I’m not saying you should be checking all of the companies you pretend to invest balance sheets, but to be aware that they exist and can have an impact.

Technical Analysis & Fundamental Analysis

These analysis represent the data an investor retrieves from a particular company prior to investing in buying or selling shares.

Some people say fundamental analysis isn’t important while others say both technical and fundamental are, etc, etc.

Despite the different points of view, you should understand about both in a good level.

Fundamental analysis is the capability of e.g. reading a balance sheet; linking the news to investors’ emotions; quarterly results; new products launched; and so on…

Technical analysis encompasses every information that we think we can fetch from the stock company graphs, while using different indicators (RSI, VWAP, Boilinger Bands, etc…) and strategies (Pair Trading, Short Squeeze, etc…).

Emotions

“The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”

– Warren Buffet

I couldn’t agree more with the previous quote. If you’re every minute checking the value of your stocks, and can’t hold it for a long period of time, then you shouldn’t be in the stock market at all.

Diversification

Investing in the stock market is a good way to diversify your portfolio in order to strengthen your compound interest.

Disclaimer: The stock market can be a really risky bet if you don’t know what you’re doing. Please still make your own due diligence before making any investment.

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