Volume 3, Number 9, November 3, 1997
heard a lot lately about the stock market and the wild price swings
taking place on Wall Street. But what are stocks anyway? Are they some
form of gambling chips? It seems that way when you read about the large
amounts of money that people make and lose when trading stocks.
xxxxStocks, common stocks in particular, are actually parts of a company. If you own stock in Walt Disney Corporation, you are part owner of that company. You own part of Disney World!
xxxxCompanies that are divided into shares of stock that a few or many people can buy and sell, are called corporations. These corporations use much of their profits (money they make) to build the company. They spend it on such things as research and development to bring out new products, creating new jobs, building new factories and equipment, and sometimes buying other companies.
xxxxThe profits that aren't reinvested into company growth are paid out to the owners (the shareholders, or stockholders) as dividends. Dividends are paid on a per share basis, the more shares of stock you own, the more money you get.
xxxxThe stock market is made up of a number of exchanges where buyers offer to purchase shares of a company's stock at a price they think is fair and that sellers will accept. Owners who want to sell, offer to give up their stocks at a price they think is fair and that buyers will pay. When those two prices are the same, a sale is made. Millions of shares are traded (bought and sold) every business day.
xxxxWhen things are looking better for a company, more people want to own its stock. The owners are not as anxious to sell. That makes the price go up. But sometimes disappointing news comes out about a certain company. Buyers aren't willing to pay as much and those holding the stock are more willing to sell, even if it means taking less money than they paid for it. Then the price falls.
xxxxPerhaps someday you'll want to start a business. If you don't have enough money to start your company, you might issue and sell shares of stock. That means you'll have to share ownership with others, but you can get the money you need to start up.
xxxxStocks may seem like a gambling game, but they are really the building blocks of most large companies.
1. Stocks are __________.
a. something to keep your feet warm
b. one hundred dollar bills
c. part ownership of companies
d. only for rich people
2. A corporation is a company that ___________.
a. is owned by stockholders
b. fires your uncle
c. never loses money
d. pollutes the environment
3. If you buy something for a dime and sell it for a quarter, you come out fifteen cents ahead. That fifteen cents is your ___________.
4. When a company reinvests money, it ___________.
a. throws it away
b. pays it to its stockholders
c. spends it on making the company grow
d. charges too much for its products
5. When a corporation is making a lot of money, it usually pays some of it to the stockholders. Those payments are called ___________.
Imagine that you are starting a new corporation. What kind of business would it be? Who might want to buy stocks in your company?
Copyright 1997 RHL
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