You've probably heard stories about people losing and gaining tons of money in this thing called the stock market. But what does it really all mean?
In order for a company to expand and grow, they need to raise money. This can be achieved by becoming a public corporation, where the ownership of the company is split amongst individuals both inside and outside of the company. Investors pay billions of dollars to the company who then in turn gives them a certain percentage of ownership in the company. Each unit of ownership is referred to as a share.
Public companies are owned by a consortium of banks, private individuals, and regular people just like you. Through a broker, and more often your bank, you can purchase a share of the ownership of a number of companies listed on stock exchanges around the world. Shareholders are allowed to attend annual meetings, appoint directors, and decide on major issues which affect the company. As an owner, you also receive a slice of the profit - if the company makes $1 billion in profit, and there are 100 million shares, each share receives $10 - called a dividend. If you own 20 of said shares, for example - your dividend check would be worth 20 x $10 = $200. It comes in the mail - pretty easy money for not doing anything. Shareholders are also allowed to sell their shares - that is where the stock market comes in. If a company is doing very well, ownership would be in high demand, thus the value of the share goes up. If you purchased 1000 shares of a company, and the price of the stock goes up $3, you can ideally sell your 1000 shares and make a $3000 profit. The only problem is, you've given up ownership in the company and can miss out on larger dividends and even higher stock values. The key is to think long term.
Take for example Apple - maker of the iPod , iPhone, and the Macintosh computer. If you had invested $50,000 in Apple Inc. (NASDAQ: AAPL) five years ago, that investment would be worth a cool $1.2 million today. In the last 5 years, shares in the Silicon Valley company have gone up $160, or 2273% (charts). This works out because 5 years ago, Apple shares were hovering around the $7 mark. $50,000 five years ago could afford you 6887 shares. Today, those 6887 shares are now worth over a million dollars, because Apple's share price has gone up to $167 ($167 * 6887 = $1,150,129). To put that in perspective, if you had decided 5 years ago to purchase Apple shares instead of a 2nd generation 20GB iPod for $499, you'd have $11,000. That is a lot of apples.
Apple may be an extreme example, but overall a diversified portfolio - lingo for having money in different companies - will yield a reasonable return in the long run. This is much better than the pennies on the dollar you'd receive from your bank.
13 comments:
I am the first to comment on your new blog. And I must say the information you're providing is pretty good! Keep up the good work! Btw your blog just hit Digg upcoming :)
Apple did a 2-for-1 split in that 4 year period, you'd have double the number of shares now.
What you fail to mention is that AAPL does not pay dividends
Risk, tbh
anonymous #1 - the $7 figure is split adjusted....and anonymous #2 - not many tech companies pay a dividend....
:(
the 2 for 1 split is accounted for in the $7 price. Apple shares were never actually trading for $7, they were trading for 14... but when you double the number of shares, the value dropped to $7. So the math is right, it's just accounted for differently.
And Apple doesn't pay dividens.
Also for comparison purposes, $50,000 invested in Microsoft on that same day would be worth just about $60,000.
I in fact bought about 200 share about 5 years ago at about 7; I sold some at some point (when they had doubled) and it has split once. So now, I have 300 shares worth more than $50,000 and that alone means I don't have to feel guilty about all the ipods I bought. Still, that's a big chunk of my non-retirement portfolio and with my 17 year old thinking about college, I'm thinking about selling. Anyone has any thoughts?
Fran, you still have another year before college tuition comes up. I say wait and see - definitely unload some of that value into a savings account for the first year of fees. And re-evaluate your options a the years go by. Hopefully the price keeps high and there aren't any sudden drops.
Or... If you kill your child you are $50,000 richer!
(Hint)Get life insurance on him first, then your investment will really pay off!(/hint)
why would anybody joke about killing a kid? sad man.
Fran, you'd do well to borrow the money to put your kid through college. And let them borrow some too. The interest on Student loans is tax-deductable. And you don't have to pay until he/she graduates.
And you can keep your money in the stock market for four more years.
Great post! Here's another article along the same lines.
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