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Financial Literacy

Financial Literacy

Home Finance Investing Stocks as Ownership

Stocks as Ownership

It's Tuesday night and you're bored. For fun, you go online and buy one Google stock (because the ticker symbol for Google is GOOG and that made you laugh at 3:00AM).

What does that mean?

It means you now own 1/680,000,000th of Google. So, uh, did you just waste a precious few minutes when you could have been watching cat videos?

What you've just bought is hope that Google will continue to be the search engine everyone uses and the self-driving car everyone doesn't believe is real. You've bought some risk—and the possibility of money later on.

But how will money come to you from your late-night impulse buy?

Google historically has not paid a dividend, even though the company has lots of money. If you bought a stock in another company, you might earn some dividends…but they'd likely be small and not worth throwing a parade about (unless you really love parades, in which case, bring on the glitter).

So what did you actually buy in the middle of the night? Well, you are now the proud of owner of a stock certificate. Yep, a piece of paper.

And…

Cash Value

In 2014, Google had 680,000,000 shares outstanding and was worth about $330 billion, which works out to about ($330 billion by the 680 million shares outstanding) $485 and spare change per share in cash. (You, however, paid $550 for your share. Why? Market prices of shares vary depending on supply and demand, and since the demand for Google shares is pretty high, you can imagine they'd want to make some moolah off of them.)

You don't actually have that money to spend until you sell your stock, but it's there in theory.

Earnings per Share (Profit)

In 2014, GOOG earned $20.82 a share (using "GAAP," or generally accepted accounting principles).

Wall Street analysts (those guys in suits you see interviewed on the news) predict that in 2016 the stock will earn about $27 per share and think it might earn close to $32 per share by 2017. So if you sold the shares in a few years, you'd be able to make a profit from Google (assuming Google didn't decide to invest, in, say, typewriters). It also means that when you're trying to sleep and wondering about equity value of the stock, you can subtract about $485 from the $550 you paid in cash, which means you really only paid $65 for the share. It's like buying an $800,000 house with a one-of-a-kind $100,000 Elvis mural in it. If you paid someone to haul away the mural and sold it, it would be as if you'd bought the house for $700,000.

Equity value of your stock works the same way.

Future Profits and Value of the Company

Google is likely to grow, which means that the earnings per share and the value of the stock will likely go up. How much? That's impossible to predict (unless you know the only reliable psychic on earth, in which case we want their number). The point is that as the company grows, its stock will also grow in price. Hopefully, by the time you sell, tons of people will want to buy GOOG stock, and you will get a lot more than $550 for your share.

So immediately, your late-night impulse buy cost $550 (plus fees to your broker) and got you about $485 of the cash Google might be worth. However, depending on how long you keep the stock, you can earn profits of, say, $20-$40. 

Should you have invested in a pint of Häagen-Dazs instead? Only time will tell.

And it does come down to time. When you hold onto stock, you give the stock a chance to grow in profit and cash value. Hopefully, by the time you want to sell, that stock will have soared even higher, letting you sell at maybe even four times your initial investment.

Ice cream can't do that.

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