There’s a high chance that your kids come back from school asking you about the meaning of stock that they’ve just heard on the radio or seen on social media. I can get how hard explaining these topics to kids may seem, and that’s probably why you’ll need some help.
In this article, YounGo walks parents through the stock to help them understand this concept better and be able to clarify it better.
Table of Contents
What Are Stocks?
Stock or equity is an ownership representative of a piece of a company or corporation. Shares are units of stocks that show how much stock someone owns. Imagine a company as a cake, and each slice of that cake is called shares. In order for you to own stock, you should take a slice, or in other words, purchase a piece of the company. After purchasing the stock, you are one of that company’s official owners and a part of its profit.
Why Do People Purchase Stock?
People tend to purchase stock for many reasons, such as:
- Capital Appreciation: the increase in the investment’s market price or the difference between an investment’s selling and purchasing price is capital appreciation. For instance, if someone purchases stock and pays £10s per share and the price rises to £13, the person has attained £3 in capital appreciation.
- Divided Payments: When a company’s board of directors determines to allocate the earnings to shareholders as cash or reinvestment in stocks, that’s what we call dividends.
- And some others buy stocks to gain the capability to influence the company.
How Are the Stocks Issued?
Companies and corporations issue the stock to raise funds and gain money for different things such as:
- Making money to pay off their debts
- Have enough money to produce or launch new products and services
- Expand their business into new markets
- Upgrade their facilities.
Stock Market
The place where you can purchase and sell a stock is the stock market. OTC or Over-The-Counter also is included where the investors can connect and trade directly with one another.
What Are Different Types of Stocks?
All the stocks in the market fall under two main categories, Common and Preferred.
Common Stocks: This type of stock authorizes the owners to have a say and vote at meetings or acquire dividends.
Preferred Stocks: The owners of this type of stock don’t have the right to vote but often are a higher priority than the common shareholders.
These two categories may also be broken down into other classes, such as Value, Income, Growth, and Blue-chip stocks.
Value Stocks: In this type, the PE or Price-to-Earning ratio is low, which means they are cheaper than others.
Income Stocks: The dividends are paid unfailingly, and investors purchase these stocks because of the income they generate such as utility companies.
Growth Stock: In this type, the growth of earnings is faster than the market’s average speed. The Growth stocks don’t pay dividends. Investors buy them for capital appreciation, more like start-up companies.
Blue-chip stocks: Shares on a large scale are called blue-chip stocks.
The Risks and Benefits of Stocks
As we mentioned in our blogs before, there is no right or wrong answer as various stuff may have various pros and cons, and the priority of each varies for different people. In order to find out more about stocks, it’s a good idea to take a look at their benefits and drawbacks.
Advantages of investing in stocks
When you’re explaining the meaning of investing to your kids, be sure to add investing in stocks and talk about its benefits and drawbacks.
- Benefit from a growing economy: It’s obvious that with the growth of the economy the earnings and profits of corporations will also grow. This can generate income and increase sales.
- Be Ahead of Inflation: Naturally, when you purchase stocks, you are thinking about the future. Investing in stocks can help you stay ahead of the potential inflations.
- Simple to Purchase: The process of entering the stock market and being a shareholder of a company is easy as pie. All you need to do is to set up an account, and you are good to go. However, we suggest you study well before diving into it.
- You Don’t Need a lot of Money to Begin: Some retail brokers let people trade stocks with no commission, and some others don’t mandate account minimums.
Drawbacks of investing in stocks
- High Risk: There’s a chance that you lose your money due to the company’s bankruptcy.
- It Can Be Time Consuming: Whenever you decide to invest in stocks, you should put a lot of time and effort into it. There’s a lot of study and research you should do before choosing the most profitable corporation. In addition, you need to learn how to read financial reports and statements.
- Anxiety and Excitement: you don’t need us to mention how emotional you can get by seeing the rise and fall of stock prices.
- Dead-end Competition: There’s no doubt that professional investors can perform better in investing as they are more experienced and know when is the right time for taking specific actions. Some people may think they should behave the same way. That may have very bad consequences.
To Wrap Up
In order to raise financially literate children, you should be able to use the right tools to answer their financial-related questions.
This article talks about everything you should know about stocks. It can help you have a better understanding of it, know the pros and cons and learn how to discuss it with your children.
