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What Does it Actually Mean to Invest in Stocks?

Erik Basics, Financial Education, Markets, Thoughts of a Mastermind 2 Comments

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This month, July 2018, I’ve decided to embrace my recent non-traditional and alternative thoughts on the personal finance space and talk about a number of things that I’ve been battling with internally about money, the markets and investing. This is the fifth post in this series. Please go back and read the first post on Energy and The Earth is a Closed System, and the second post on What is Money.  I’m not an expert – just a regular person trying to find the truth.

In the United States, one of the first thoughts you might have when thinking about investing is the stock market. “I want to invest my money. I can invest in stocks!”

This month, July 2018, I’m looking to explore the finance world, and look to touch on a number of things which have seemingly been lost or ignored in the personal finance space. Stocks and investing in the stock market are thrown around without care and deep thought.

In this post, I will be looking at what it actually means to invest in stocks, what makes a stock valuable, and give some other thoughts on investing in stocks.

What is a Stock?

Let’s start off with the basics, as I love to do in my articles here on the blog.

What is a stock?

Simply put, a stock is a paper representation of a piece of a company. It represents an ownership stake in a certain company. When a company (private or public) forms, shares of stock are distributed to the owners and shareholders depending on the money and work put into the company.

In my small business, I own a certain percentage of stock in my company. At my day job, we were given some shares of stock a few years ago, so I now own some company stock.

What Makes a Stock Valuable?

the guide to banking for non-bankersWhat makes a stock valuable?

For a given company, the value of the stock is dependent on the future profitability and productivity of the company. This value could be high if the company is growing and is profitable, and this value could be low is the company is struggling.

The value of a share of a certain stock in a company is NOT the price of a share listed on an exchange. This is something that seems to be lost in many people’s heads (maybe it was never there).

Stocks are valuable because of the future expectations of the various companies associated with those stocks.

In the United States, the economy is the strongest in the world and many of the best companies are headquartered here. Most of these companies are profitable and productive, and as a result, having an ownership stake in some of these companies makes sense because there is value there.

That being said, does the value line up with the price? There are a number of investing books which could help you understand how to value a company by looking at fundamentals and considering the macroeconomic environment.

If you know how to value a company, then you could ask questions about the present day market: does it make sense to pay $1800 for a share of Amazon? Is Netflix worth it when the price to earnings ratio (essentially, price of a share divided by profits) is 200+? Why are bank stocks falling?

Remember: value is what you get, price is what you pay.

Will the Stock Market Go Up or Down in the Future?

In the past couple of weeks, I’ve made a number of comments on my podcast, Twitter, and even a little bit on the blog here implying I know things about the future stock market direction.

If anyone thinks they have a crystal ball, turn around and head in the other direction. The only thing I know is that I know nothing at all. Gurus, “experts” and people who think they can predict the future are delusional (in my opinion).

Daily market moves are more or less noise. In the past, in the United States markets, the stock market has trended up over time. In other markets, the stock market has gone up some, gone down some, and sometimes stay flat for many years.

I have no idea where the stock market will be in the future.

At the end of the day, what I want to do with this blog is give you the tools to think for yourself. I believe critical thinking is important in any actions and steps you perform.

Will the stock market go up or down in the future? Yes.

Concluding Thoughts on Investing in stocks

Ownership in companies through stocks has been a way to store and grow wealth over time.

This article was a little shorter than the other ones in this series, but was necessary to write to clear up a few things.

The main point of this article is that I wanted to make it clear that stocks are not valuable by themselves. Every once in a while it’s good to get a reminder of what actually is behind some of the more complex things in the world.

What it means to actually invest in stocks is that you are investing in companies which you believe with be productive and profitable going forward. 

Again, stocks are only valuable because they represent the future cash flows and productivity of a company. Buying an individual stock makes sense if you believe a company will continue to produce goods and services for their consumers in way that allows for continued success. Selling a stock makes sense if you believe a company may not be able to be as profitable or productive in the future.

Price is what you pay, and value is what you get.

Finally, just remember: stocks will always go up and down. That’s the only guarantee in stocks 🙂

Hope this article was enjoyable and gave you some good information on stocks.

In the next post, I will be touching on some more fundamental knowledge we need to cover. Then to round out the series, I’m going to write about some controversial thoughts and opinions I’ve been battling with internally.

Thank you for reading,

Erik

How to invest in the stock market. How to get wealthy. What is a stock. Investing tips. #stocks #money #investing

How to invest in the stock market. How to get wealthy. What is a stock. Investing tips. #stocks #money #investing

How to invest in the stock market. How to get wealthy. What is a stock. Investing tips. #stocks #money #investing

How to invest in the stock market. How to get wealthy. What is a stock. Investing tips. #stocks #money #investing

How to invest in the stock market. How to get wealthy. What is a stock. Investing tips. #stocks #money #investing

How to invest in the stock market. How to get wealthy. What is a stock. Investing tips. #stocks #money #investing

 

 

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Comments 2

  1. Okay fine. I’ll take the bait and debate this one with you.

    It’s true that nothing with stocks (or life) is ever guaranteed….but, you can have certain expectations based on the nature of the asset type and historical performance.

    Stocks are valuable because you are owning a piece of a business tasked with making profits. As a stockholder, reap the benefits of those profits. If the business did not think it could make profits any longer, it would stop doing business.

    It’s hard to predict what any individual business may do. It’s just as hard to figure out what will happen to the economy or collection of all businesses in the short term. BUT, over the long term, holding a broad based equity index fund is extremely likely to be profitable and provide a return for investors. I don’t believe that the S&P 500 has ever had a loss over a 20+ year period.

    Nothing is guaranteed. We could all wake up (or not) in the stone age again tomorrow. Still, I’m very confident that investing in the S&P 500 or a similar fund today will show me some return 20+ years from now.

    BTW – Was it my article you were talking about in the last podcast?

    https://www.winningpersonalfinance.com/the-stock-market-will-always-go-up-over-time/

    1. Post
      Author

      I’m not sure what we are debating because I didn’t really make any strong points in this article 🙂 I plan to write a more targeted article on the matter next week though regarding why I believe or don’t believe certain things.

      I get the math, and I get the logic. It’s all sound.

      Something I want to say here, is that it is not logically equivalent to say “the stock market is a sh** hole investment” is equal to “the stock market will not always go up” as I typically get as push back. I would also argue that these statements aren’t equivalent either: “the stock market always goes up” and “the stock market is the best investment”.

      As I will be writing about shortly, stocks have value in everyone’s portfolio (including mine). I made the point in my article today that in the past, and probably going forward, that they have been a good store of wealth and good for growth as well.

      Also, I did read that article of yours, but you are 1 of many who say that it will always go up over time. So HLT and I were certainly not calling you out or anyone in particular, just the way of traditional personal finance speaking in the broader sense that hindsight is 20/20 and if you don’t have the skills to make money and create wealth for yourself, then there is risk involved.

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