Brian Dress explains that a stock is an ownership share in a company. Large-cap U.S. stocks have returned about 10% annually since 1926, turning $1 invested then into roughly $6,000 today. Shareholders earn through price increases and dividends.
Welcome to Fundamentals of Investing from Left Brain Investment Research. Today we answer: What is a stock? I'm Brian Dress, Director of Research here at Left Brain Investment Research. This video is the first in a series from Left Brain to help you understand the concepts we use to make investment decisions. Today we start with the basics: What is a stock? The basic idea is simple: companies need money to grow. When a person buys a share of stock, they purchase a part of that company and its growth and its profits. Let's take a closer look on how stocks work in the investment world. Stocks are referred to as securities. These securities represent an ownership share of a company. Stocks generally trade on a regulated public exchange, like the New York Stock Exchange or NASDAQ, and most every country around the world has its own regulated exchange system. Companies issue shares as a way to raise money to facilitate the growth of their business. This process is called an initial public offering, or an IPO. The owner of a stock is called a shareholder. This name comes from the concept that the owner of a stock holds a claim on a fractional share of the company's profits. Shareholders make money in stocks in two main ways. The first way is capital appreciation. Shareholders make money as the price of their shares increases in the stock market. The second way shareholders make money is through dividends. Dividends are direct cash or stock payment distributed straight from the company's treasury to the shareholder, and usually on a quarterly basis. When you've done your research and have purchased a stock that grows, it's a great way to make your money make you money. Stocks are not the only choice for investing, but they're a preferred choice for many investors for a specific reason, and that reason is historical performance. As you can see on the slide here, stocks have outperformed other investments like bonds, cash, and T-bills over the long term. Large-cap stocks have returned about 10% annually since 1926, far outpacing the 5.5% return in bonds and the 3.4% return in T-bills. Compounding really enhances this effect. $1 invested in stocks in 1926 would yield $6,000 90 years later, far outpacing the total return of bonds and T-bills. Our research has shown that stocks provide the best chance to grow capital over the long term. And protect investors against inflation. When you buy a stock, you're buying part of a company and you become part of its success. But all companies have ups and downs, and so do their stocks. But over time, well-chosen stocks have increased in value for investors with better returns than other investment choices. If you had your investing question answered here today, click the subscribe button below. You'll get the latest from Left Brain Investment Research and join our community of Left Brainers. Our association of savvy investors trained in our philosophy. Check us out at our website, www.leftbrainir.com. I'm Brian Dress for Fundamentals in Investing. See you next time.
