Investing in Stocks? Start Here.

The Beginner's Guide to Investing in Stocks

Learning about your own money is a powerful thing. Once you get a paycheck, you learn about checking accounts and savings accounts and maybe even retirement early on, if you’re lucky. When you’re sitting through the HR training about retirement, they might talk to you about a 401k and how “you should start investing when you’re young blah blah compounding interest blah blah,” but they never actually tell you what any of it means. So here is the guide to the question I was too embarrassed to ask when I started my personal finance journey: What on earth is a stock?

What Is A Stock?

A stock is physical ownership in a company. By owning a stock in a company (referred to as a “share”), you own an actual piece of that company, all of its profits, its debts and its future.

Does this mean you can purchase a share of Apple and then march into Tim Cook’s office to pitch him new iPhone ideas? Of course not, but you might be able to if you, say, own 10% of the company. But that at the moment is the equivalent of over $300 billion, so let’s start small.

Why Would I Own Stocks?

Can You Make Money Investing In Stocks?

Yes, absolutely! A stock represents an asset, an investment. There are several reasons for you to take the plunge and purchase a stock:

1. You are hoping it appreciates in value, turning your small amount of money into hopefully a larger amount of money over time. This is how to truly build your wealth

2. It could pay you to literally own it and then sit there, doing nothing

3. You want to vote on the direction the company goes in the future

Are you interested in starting your investing journey? Don't forget to sign up for a Robinhood account using my link here! Robinhood is giving new users a FREE stock valued up to $200, just for signing up with this link. Thanks for supporting the site!

Pretty good reasons, right? Let’s tackle the first one first. You want to own a company because you think that company will increase in value over time. That increase in value, again because a share of a company represents ownership, means that each piece of the company you own is now worth more.

Let’s take Apple Inc, back then named Apple Computers. In the year 2000, Apple was struggling. They were down on their luck, they suffered through controversy with Steve Jobs leaving and then coming back, and their share price hovered around $0.50. That’s right. 50 cents. So let’s say you took the plunge back then and bought $100 worth of Apple stock at 50 cents each, giving you 200 shares of the company. If you hung onto those shares through their dip in 2001 down to 30 cents, then through its rebound, through the iPhone and iPad and iPod, each share of Apple is now worth $149 at time of writing. This is without stock splits or dividends, which we’ll cover in a minute. That means that $100 you invested 21 years ago is now worth $29,800, again without splits and dividends. Not bad, right?

So let’s cover dividends and splits, which is point #2 I made above. Some companies make money hand over fist. They are so successful, and produce so much cash, that they see diminishing returns on how to reinvest that cash back into their own company. So what do they do with it to maximize those returns? They give it right back to the shareholders! That’s right. They pay you to hold onto their stock and do literally nothing else. It’s every lazy person’s dream, and yet many people don’t even know this exists.

Not every company pays a dividend, however. Two notable examples of non-dividend paying companies that are extremely popular are Amazon and Tesla, who take the cash they make every day and reinvest it back into growing even more. Some popular names that do pay dividends? Apple, Disney, Nvidia and the big telecoms (AT&T, Verizon) pay dividends. You receive the cash when they pay out, and you can choose to reinvest via what’s called a Dividend Reinvestment Program (DRIP), or take the cash as income (pro tip: always invest the cash unless you desperately need it!).

But what’s a “stock split?” A split is when a company literally splits their shares into multiple pieces, lowering the price of each. Think of a pizza with 4 slices. Each slice is huge, so you want to cut each in half to get 8 slices. Now each slice is more manageable. Same with stocks! A company can split if its share price rises too high to where they think a normal person cannot purchase it anymore, and they can split down. Existing shareholders still have the same amount of money invested in the company, they just have more shares. This is much less common today with the rise of fractional share programs, but it’s still normal to see a company split, like Tesla and Apple in the past 24 months.

Finally, let’s chat voting. Now that you own a share of a company, you are technically a “business owner.” I wouldn’t go around putting it on your business card quite yet, but being an owner entitles you to certain privileges. In addition to capital appreciation and dividends, you also typically get voting power at the company, with the usual structure being 1 share = 1 vote. You’ll be contacted by the company, typically via your brokerage service, who will send you a voting document on whatever the board of directors is voting on that month/quarter. It could be executive compensation, it could be the issuing of new shares, whatever! The important part is, you get a vote. Don’t waste it.

Why Do Companies Offer Shares?

Since the Dutch East India Company invented the idea of issuing shares in 1602, companies have sold shares of themselves in order to fund their business. Counter intuitive, I know, but stay with me. Companies typically start as private businesses, started by someone with a dream; you maybe. Maybe you start to get more and more successful and start to attract more customers, generating even more revenue. Now you can look at going international to reach even more customers, but you need money. Lots and lots of money. You have a few options: you can go to the bank and get a loan, which is debt that has to be paid back. You could go to venture capitalists, who invest in private companies, but you might not get the best deal possible in giving away big chunks of your company for a check. So you decide to take door #3, which is the public markets. You hire an investment bank, full of those highly paid 24 year-olds in suits that graduated from Wharton, and those suits spend 15 hours per day in spreadsheets to figure out how much your company is worth. They look at competitors of yours in the market and how they are doing, how they are priced, and they come up with a value of your company. From there, they come up with a number of shares you can sell, and give each share a dollar value. Then, they take it on the road, called a “road show,” pitching big investment firms like other banks or hedge funds to buy into your company.

Assuming this goes well, your company then makes it to “Listing Day,” which is probably the biggest day in your company’s history. Congratulations! You did it. You’re now a public company with public shares, and have now lived through the process of an "Initial Public Offering" or IPO. And you’re probably uber-wealthy now as well as your company’s shares likely increased on opening day, so don’t forget us little people down here. All it cost you was a few million dollars in fees to pay those Wharton guys, but now you have the cash to increase operations and expand outwards.

Sounds Intriguing. How Do I Start?

This is where your parents’ generation differs greatly from our generation: it’s much easier for us to get started. Chances are, if you’re in a 9-5 job, your employer has already started for you and you didn’t know it. Find your 401k on your company’s website and see what options are available for you there. Outside of your company, it couldn’t be easier.

In our parents’ generation, there used to exist a job called a “broker.” That person would facilitate the buying and selling of stocks for you after you call them and tell them what to do, and they’d charge a hefty fee for the service. Out of this was born the brokerage. A “brokerage” is essentially the middle-man between you (the buyer) and the company (the seller). You can buy and sell shares, find financial information on companies, get voting information and listen to earnings calls from the executives through pretty much every brokerage, so find one you like.

Are you interested in starting your investing journey? Don't forget to sign up for a Robinhood account using my link here! Robinhood is giving new users a FREE stock valued up to $200, just for signing up with this link. Thanks for supporting the site!

Brokerages have come an extremely long way in the way they charge you fees over the past few years. It used to be common practice for a brokerage to charge you a commission each time you bought or sold shares, usually in the range of $5-$10 per transaction. However, Robinhood exploded onto the scene several years ago with their $0 commission model, and traditional brokerage houses were losing clients hand over fist, forcing them to also bring their commissions down to $0. Now, each brokerage is pretty much the same in terms of general functionality. Just pick the one you like the most and is easiest for you to access. From there, it’s up to you! Do some research, or just start with a company you use in your everyday life. Apple, Tesla, Amazon, Disney, Netflix, whatever! This is the fun part. You're now on your way to creating a better financial situation for yourself, your children and your children's children if they aren't complete and total shit heads. Happy investing!

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Thanks for reading! Come back every Wednesday for answers to the basics you were too afraid to ask. Have a request? Hit me up on Twitter using the button below.