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What is a stock?

In short, a stock is an ownership interest in a company. When you buy a stock, you become a business owner.

Over the long term, the value of that ownership stake will rise and fall according to the success of the underlying business. The better the business does, the more your ownership stake will be worth.

A $1,000 investment in 2012 would be worth more than $16,000 as of Sep. 2, 2020, for a total return of around 1600%, regardless of the inflation effect. In the same time frame, by comparison, the S&P 500 earned a total return of just about 300%. The company, which went public in 2012, has a share price of around $295.

Difference between Stocks & Bonds

Stocks and Bonds are fundamentally different in a number of ways. 

• Bondholders are creditors to the corporation and are entitled to interest as well as repayment of principal. Creditors are given legal priority over other stakeholders in the event of a bankruptcy and will be made whole first if a company is forced to sell assets in order to repay them.

• Shareholders, on the other hand, are last in line and often receive nothing, or mere pennies on the dollar, in the event of bankruptcy.

• Stocks are inherently riskier investments than bonds.

What does it take to invest in stocks?

Investing in stocks is not rocket science. The only real characteristics shared among successful stock investors are basic math skills, a critical eye, patience, and discipline. Combine these with an understanding of how money flows and how businesses compete with one another, along with a dash of accounting knowledge, and you have all the mental tools needed to get started.

Although you don't need an advanced college degree to invest in stocks, selecting stocks is nevertheless an intellectual exercise. It requires effort, but it can bear many fruits. After all, investing in stocks not only leads to potentially higher returns on your investment dollars, it also leads to a greater understanding of how the world works.

For more investment knowledge and trends, welcome to Courses in the Community.