The Entrepreneur's Earning Catalog #2: What is a Stock? (Shares and Ownership)
Welcome back to the Catalog. In Episode 1, we fixed your mindset. In Episode 2, we define the vehicle. Stop looking at the stock market as a casino and start seeing it as a store where you buy businesses.
If you ask the average person "What is a stock?", they will say it is something you buy low and sell high. They think of it as a ticker symbol, a flashing red or green number on a screen.
This mentality is why most people lose money. A stock is not a lottery ticket. A stock is Equity. It is a legal claim to a portion of a company's assets and future earnings.
Equity vs. Debt: Understanding the Difference
Companies need money to grow. They have two main ways to get it:
1. Debt (Bonds/Loans)
The company borrows money from a bank or investors. They must pay it back with interest. The lender does not own the company. If the company becomes the next Amazon, the lender only gets their interest back.
2. Equity (Stocks)
The company sells pieces of itself. They get cash now, and they never have to pay it back. However, they have given away a piece of the pie. If the company becomes the next Amazon, the shareholder (you) gets rich alongside the founders.
Why Do Companies "Go Public"? ( The IPO)
When a private company grows large enough, it wants to raise massive amounts of capital to build factories, hire thousands of people, or acquire competitors. To do this, they launch an IPO (Initial Public Offering).
This is the moment the company lists on a Stock Exchange (like the NYSE or NASDAQ). It transforms from a private entity owned by a few people into a public entity owned by millions of shareholders.
Price vs. Value: The Investor's Secret
This is the most critical concept in this episode. Price is what you pay. Value is what you get.
The stock market is like a voting machine in the short term (driven by emotion) and a weighing machine in the long term (driven by business results).
Share Price × Total Number of Shares = Total Value of Company.
A company with a $10 stock can be "more expensive" than a company with a $1,000 stock if the first company has billions of shares outstanding.
Your Rights as a Shareholder
When you buy a stock, you aren't just gambling. You gain rights:
- Voting Rights: You can vote on the Board of Directors.
- Dividends: If the company makes a profit, they can pay a portion of it directly to you.
- Capital Appreciation: As the company grows, your slice of the pizza becomes worth more.
Conclusion
Stop watching the squiggly lines on the chart. Start looking at the business behind the line. Does it make money? Does it have a future? That is how an Entrepreneur invests.
In the next episode, we will dive into ETFs and Index Funds—the strategy that allows you to own the entire market without picking winners.
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