How to Make Money (or Lose It) With Stocks: Understanding the Basics

Discussing stock market fundamentals in the Sawtooth Valley, Idaho

While out above the stunning Sawtooth Valley with the Sawtooth Mountains behind me, I recorded a quick video breaking down stock basics. Watch the video here.

I want to explain to you real quick today about stocks–basics about stocks, how you can make money or lose money with a stock and what it is. 

What Is a Stock?

So, essentially, a stock is ownership in a company. Just like if you owned your own business, you essentially own all the stock in that business.

When you buy a publicly traded stock, you're a small owner. It doesn't give you control, obviously, but you do have ownership.

How You Can Make (or Lose) Money With a Stock

1. Dividends

The first way is with dividends. When you've got a business, generally your plan is to have it be a profitable business. And so it's going to create cash flow.

When you own your own business, you know that you're going to leave some of that money in the business so it can continue—reinvest it in the business—and some of it you're going to pay to yourself. That's what dividends are.

They come from public companies. And when they have excess money that they're not going to need for the business, then they want to pay it out to the owners. They generally try to set this up so it's a consistent amount each quarter or each year so that the owners can count on it.

So that's one way that you get return from a stock.

2. Stock Price

The second way is through the price of the stock, which is roughly correlated to the value of the business.

Now, when you own your own business, the value of that business is directly correlated to the amount of income you're making and what your growth potential is—and interest rates and some things like that.

With publicly traded stocks, it's a little bit different. It's only loosely based on that.

The way that the price of a stock is set is that on any given day in the marketplace whatever a person's willing to sell it for where they find a willing buyer, that's the price of the stock.

And as you can obviously see from the stock market, that can vary wildly. Sometimes it's based on fundamentals, like reduced cash flow for the company. But sometimes it's based on emotion. People feel less good about Apple today, and so they pay less for it. And that may have nothing to do with the underlying fundamentals of the company. It may just have to do with the environment around there.

So when you buy a stock at a certain price, when you sell it, you hope it's up and you make money. You could sell it and it's down.

But that's only roughly correlated to the value of the company. In the long term, it should line up with what's happening with the underlying fundamentals of the company.

But you got to know when you're buying stocks that the value today has to do with how people feel about it.

Recap

So you've got dividends to give you consistent return—hopefully.

 And you've got the price of the stock.

 And that's where your gain or loss comes from in ownership of a company or a stock.

Thanks.