A stock is a portion of a company’s ownership.
The stockholder, as the owner of the stock, has a claim on the company’s assets and earnings.
Assume John has just started a business and needs $200,000, but he does not want to borrow money from a bank. Instead, John invests $20,000 of his own money into the company and seeks out other investors who are willing to put up the same amount.
In exchange, he offers each investor a certificate representing 10% of his business. Each certificate is worth 10% of the company’s assets and earnings in the future.
After a year, the company is performing well, and its overall worth has increased double ($400,000). This means that each of the company’s shares is now worth $40,000 each. The company’s original investors can sell their equity to new investors for a profit of 100%.On the major stock exchanges, stocks are purchased and traded daily. This is the way stocks operate.
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