What is a stock? Part 5 - End
The conclusion to our exciting series! Our heroes will learn the agony of defeat and the thriftiness of bargain shopping. SHOCKING!
How do you lose money in the stock market?
Then! The next day, a dentist goes on tv and says, "Brushing your teeth with caffeine is probably not a good idea."
Now everybody starts thinking that Fred Co.'s toothpaste is bad stuff, and they stop buying it. Newspapers report that Fred Co. is not a very good company. People on television shows start making jokes about how they're so glad they don't own part of Fred Co. And poor Big John gets upset. He doesn't want to own part of a bad company. He goes back to the stock market to sell his two tickets.
At the stock market, Khofi says, "No thanks. I don't want to buy your shares of stock. Nobody wants to buy it."
"But wait," Big John says, "My two tickets will still get two pieces of pie at the end of every year."
"That's true," Khofi says. "But now that Fred Co. isn't selling very much toothpaste, it's going to be a much smaller pie. Who wants two pieces of a tiny pie?"
That's when Thrifty Jane shows up. Thrifty Jane knows that Fred Co. isn't worth very much right now, but she thinks that they might make a new toothpaste next year, and then they could make a lot of money again. She sees big pie in that company's future, and she wants two pieces of it. So Thrifty Jane offers Big John ten bucks for each share of stock. Big John is very sad. He spent twenty thousand dollars on these two tickets, and now all he can sell them for is twenty bucks.
"Buying and selling stock is hard," Big John says. "You never really know when your tickets will be worth more money, and when they will be worth less."
Reluctantly Big John gives Thrifty Jane his tickets and takes her twenty dollars. The money you lose by buying shares of stock and then selling them for less is called a capital loss. Capital losses are no fun.
But Thrifty Jane isn't worried. She doesn't go to the stock market very often. She's not interested in capital gains or capital loss. She just wants the dividends, that piece of the Fred Co.'s pie she'll get every year just for owning those two shares of stock. A person who buys stock and doesn't sell it for a long time is called a long-term investor. Long term investors generally come out better than people who keep going to the stock market and buying and selling stocks all the time. Long term investors who buy shares of big companies' stocks tend to make more money than short-term investors. This is because a stock's value can go up and down a whole lot in the short term -- so it's easy to lose out like Big John -- but they tend to go up a little more than down. So if you hold on to a stock for years and years, it will go up and down some, and up more, and down some, and up more, and when you sell it it will probably end up more valuable than when you bought it. That's not as exciting as trying to make a ton of capital gains money all at once like Khofi did, but you'll get dividends every year and when you do sell, you'll probably come out ahead.
What is selling short?
What is a mutual fund?
How do you know which companies are good and which are bad?
Why are there so many stock markets?
Why do coporations have to borrow money?
How do you make a ton of money really fast?
What is a stock market crash?
What is a bond?
Where do babies come from?
Gosh you people ask a lot of questions. Don't you have mothers? Go ask your mothers.
How do you lose money in the stock market?
Then! The next day, a dentist goes on tv and says, "Brushing your teeth with caffeine is probably not a good idea."
Now everybody starts thinking that Fred Co.'s toothpaste is bad stuff, and they stop buying it. Newspapers report that Fred Co. is not a very good company. People on television shows start making jokes about how they're so glad they don't own part of Fred Co. And poor Big John gets upset. He doesn't want to own part of a bad company. He goes back to the stock market to sell his two tickets.
At the stock market, Khofi says, "No thanks. I don't want to buy your shares of stock. Nobody wants to buy it."
"But wait," Big John says, "My two tickets will still get two pieces of pie at the end of every year."
"That's true," Khofi says. "But now that Fred Co. isn't selling very much toothpaste, it's going to be a much smaller pie. Who wants two pieces of a tiny pie?"
That's when Thrifty Jane shows up. Thrifty Jane knows that Fred Co. isn't worth very much right now, but she thinks that they might make a new toothpaste next year, and then they could make a lot of money again. She sees big pie in that company's future, and she wants two pieces of it. So Thrifty Jane offers Big John ten bucks for each share of stock. Big John is very sad. He spent twenty thousand dollars on these two tickets, and now all he can sell them for is twenty bucks.
"Buying and selling stock is hard," Big John says. "You never really know when your tickets will be worth more money, and when they will be worth less."
Reluctantly Big John gives Thrifty Jane his tickets and takes her twenty dollars. The money you lose by buying shares of stock and then selling them for less is called a capital loss. Capital losses are no fun.
But Thrifty Jane isn't worried. She doesn't go to the stock market very often. She's not interested in capital gains or capital loss. She just wants the dividends, that piece of the Fred Co.'s pie she'll get every year just for owning those two shares of stock. A person who buys stock and doesn't sell it for a long time is called a long-term investor. Long term investors generally come out better than people who keep going to the stock market and buying and selling stocks all the time. Long term investors who buy shares of big companies' stocks tend to make more money than short-term investors. This is because a stock's value can go up and down a whole lot in the short term -- so it's easy to lose out like Big John -- but they tend to go up a little more than down. So if you hold on to a stock for years and years, it will go up and down some, and up more, and down some, and up more, and when you sell it it will probably end up more valuable than when you bought it. That's not as exciting as trying to make a ton of capital gains money all at once like Khofi did, but you'll get dividends every year and when you do sell, you'll probably come out ahead.
What is selling short?
What is a mutual fund?
How do you know which companies are good and which are bad?
Why are there so many stock markets?
Why do coporations have to borrow money?
How do you make a ton of money really fast?
What is a stock market crash?
What is a bond?
Where do babies come from?
Gosh you people ask a lot of questions. Don't you have mothers? Go ask your mothers.