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| stock [2025/07/12 06:21] – created xiaoer | stock [2025/07/30 16:46] (current) – xiaoer |
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| ======Stock====== | ====== Stock ====== |
| Stock (also known as '[[equity]]' or '[[share]]') is, quite simply, a slice of ownership in a publicly-traded company. When you buy a stock, you aren't just buying a digital blip on a screen; you're becoming a part-owner of a real business. Imagine a company is a whole pizza; a share of stock is one slice. As an owner, you have a claim on the company's assets and, more importantly, its future [[earnings]]. This is the fundamental building block for most investment portfolios and the primary vehicle through which [[value investing]] is practiced. It represents the difference between being a speculator betting on price wiggles and being a business partner investing in the long-term success of an enterprise. This shift in mindset is the first step toward becoming a successful investor. | A stock (also known as a [[share]] or [[equity]]) is a security that represents a slice of ownership in a [[corporation]]. When you buy a company's stock, you are not just purchasing a piece of paper or a digital blip on a screen; you are becoming a part-owner of that business. This ownership stake entitles you, the [[shareholder]], to a claim on a portion of the company's [[assets]] and [[earnings]]. Think of a large pizza: a company can slice itself into millions or even billions of pieces, and each stock represents one of those slices. If the pizza (the company) gets bigger and more valuable, so does your slice. Most stocks of large companies are traded on a [[stock exchange]], like the New York Stock Exchange or the Nasdaq, creating a marketplace where buyers and sellers can easily trade these ownership stakes. For a value investor, understanding that a stock is a piece of a real business—not just a ticker symbol to be gambled on—is the foundational first step toward sound investment. |
| ===== The Two Flavors of Stock ===== | ===== Why Companies Issue Stock ===== |
| Just like ice cream, stock comes in different flavors, each with its own characteristics. The two main types you'll encounter are common and preferred. | Why would a company sell off pieces of itself? The primary reason is to raise money, or //capital//. Imagine you own a successful local bakery and want to open five new locations. You might not have enough cash on hand, and you might not want to take on a massive bank loan. Instead, you can sell shares of your bakery to investors. This process is called an [[Initial Public Offering (IPO)]] when a company first offers its stock to the public. The cash from selling these shares provides the fuel for growth—to build new factories, fund research and development, expand into new markets, or hire more people. In essence, the company trades small pieces of ownership for the capital it needs to become more valuable, which ideally benefits everyone in the long run. |
| ==== Common Stock ==== | ===== What Owning a Stock Gets You ===== |
| This is the type most people mean when they talk about "buying stocks." As the name suggests, it's the most common. Ownership of common stock typically grants you [[voting rights]], giving you a tiny say in how the company is run, such as electing the [[board of directors]]. Think of it as your shareholder democracy in action. The real prize, however, is the potential for growth. If the business does well, the value of your share can increase (called [[capital appreciation]]), and the company might share its profits with you in the form of [[dividends]]. The catch? It's all potential, not a promise. And if the company goes belly-up, common stockholders are the last in line to get paid, if there's anything left at all. | As a part-owner, you're not just a silent partner. Ownership comes with certain rights and potential rewards. The two most significant benefits are the potential for profit and a voice in the company's future. |
| ==== Preferred Stock ==== | ==== The Two Paths to Profit ==== |
| Preferred stock is a bit of a hybrid, sitting somewhere between a stock and a [[bond]]. Its main attraction is a fixed, regular dividend payment that the company must pay to preferred stockholders //before// any dividends are paid to common stockholders. This makes it a more predictable source of income. In the unfortunate event of a [[liquidation]], preferred shareholders also get their money back before common shareholders. The trade-off for this "preferred" treatment is that you typically give up voting rights and the explosive growth potential that comes with common stock. It offers more safety than common stock but less than a bond. | Investors typically make money from stocks in two primary ways: |
| ===== Why Own Stocks? A Value Investor's Perspective ===== | * **Dividends:** If the company you've invested in is profitable, its board of directors may decide to distribute some of those profits directly to its shareholders. This payment is called a [[dividend]]. It’s like getting your share of the company’s quarterly or annual earnings in cash. Not all companies pay dividends; many younger, high-growth companies prefer to reinvest all their profits back into the business to grow even faster. |
| Buying a stock isn't a lottery ticket; it's a long-term partnership with a business. For a value investor, the "why" is everything. | * **Capital Gains:** This is the profit you make from selling your stock for a higher price than you paid for it. If you buy a stock for $50 and its price rises to $70 because the company performs well, you've earned a [[capital gain]] of $20 per share when you sell. This appreciation in price is often the main driver of returns for investors, especially in companies that are rapidly growing their [[intrinsic value]]. |
| ==== The Power of Compounding ==== | ==== A Voice in the Company ==== |
| Legendary investor [[Warren Buffett]] describes [[compounding]] as a "snowball of money" that grows as it rolls downhill. Owning a piece of a profitable business is the ultimate snowball. As the company reinvests its earnings back into the business to grow, or pays you dividends which you can then reinvest, your initial investment can grow exponentially over time. It's the patient investor's secret weapon for building wealth. | For most types of stock, ownership comes with [[voting rights]]. This means you can vote on important corporate matters, such as electing the board of directors, approving a merger, or other major company policies. While a small investor's single vote might seem insignificant, collectively, shareholders wield the ultimate power over the company's management. |
| ==== A Claim on a Real Business ==== | ===== The Two Main Flavors of Stock ===== |
| A stock's [[market price]] constantly dances around, but a value investor focuses on what's solid and real underneath: the business itself. The goal is to determine a company's [[intrinsic value]]—what it's //actually// worth based on its assets, earnings power, and future prospects. You then aim to buy the stock at a significant discount to this value. This discount is your [[margin of safety]], a concept championed by [[Benjamin Graham]], the father of value investing. It's the cushion that protects you from bad luck or errors in judgment. You're not buying a ticker; you're buying a dollar's worth of business for fifty cents. | Not all stocks are created equal. They generally come in two main varieties: common and preferred. |
| ===== Risks to Consider ===== | === Common Stock: The Everyday Choice === |
| While the rewards can be great, stocks are not a one-way ticket to riches. Understanding the risks is crucial. | This is what most people mean when they talk about stocks. [[Common Stock]] represents true ownership and comes with voting rights. Common shareholders have the potential for unlimited upside—if the company becomes wildly successful, the value of their shares can multiply many times over. However, they also take on the most risk. In the event of a [[bankruptcy]] or liquidation, they are the last in line to be paid, after creditors, bondholders, and preferred stockholders. |
| ==== Market Volatility ==== | === Preferred Stock: The VIP Pass === |
| In the short term, the stock market can be a wild and emotional place. Benjamin Graham personified this volatility as [[Mr. Market]], your manic-depressive business partner who, on any given day, might offer to buy your shares at a ridiculously high price or sell you his at a despairingly low one. A value investor learns to ignore Mr. Market's mood swings and use his pessimism to their advantage by buying when prices are low. | [[Preferred Stock]] is a bit of a hybrid, with features of both stocks and [[bonds]]. |
| ==== Business Risk ==== | * **Fixed Dividends:** Preferred shareholders are typically promised a fixed, regular dividend, much like a bond's interest payment. This dividend must be paid //before// any dividends are distributed to common shareholders. |
| This is the risk that the company you've invested in simply performs poorly. Fierce competition, incompetent management, or a revolutionary new technology could cripple its profits. If the business fails, your ownership stake—your stock—could become completely worthless. This is why thorough research into the business itself is non-negotiable. | * **Priority in Liquidation:** If the company goes under, preferred stockholders get paid back before common stockholders. |
| ==== Inflation Risk ==== | * **No Voting Rights:** This security and priority usually come at a cost: preferred shares generally do not come with voting rights. |
| Over the long haul, stocks of great companies have proven to be a fantastic defense against [[inflation]]. However, periods of high inflation can be painful. It can increase a company's costs, squeeze its profit margins, and erode the real purchasing power of your investment returns. | ===== A Value Investor's Perspective on Stocks ===== |
| | To a follower of [[Value Investing]], the philosophy championed by figures like [[Benjamin Graham]] and [[Warren Buffett]], a stock is viewed through a specific, business-focused lens. |
| | ==== It's a Business, Not a Lottery Ticket ==== |
| | The most critical mindset shift is to see a stock for what it is: an ownership interest in a business. You are not betting on a squiggly line on a chart; you are partnering with a company that has real management, products, and competitive advantages. Before investing, a value investor studies the business itself by reading its [[annual report]], analyzing its [[income statement]] and [[balance sheet]], and understanding its long-term prospects. The goal is to find wonderful businesses, not just popular stocks. |
| | ==== Price vs. Value ==== |
| | //“Price is what you pay; value is what you get.”// This famous Buffett quote is the heart of value investing. The market price of a stock can swing wildly day-to-day based on news, emotion, and speculation. The //intrinsic value//, however, is an estimate of the business's true underlying worth. A value investor's core task is to calculate that intrinsic value and buy the stock only when the market price is significantly below it. This gap between the price you pay and the value you get is called the [[margin of safety]], which is your ultimate protection against risk. |
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