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Stocks: Understanding Investment Performance

Chapter 8 /  Lesson 6   Transcript
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  • 0:02 Stocks
  • 2:33 Dividends
  • 3:05 Earnings
  • 4:36 Example
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Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

Many large companies around the world are owned by the public in the form of stocks. Watch this video lesson to learn how stockholders earn money when the company does well.

Stocks

Many large companies in the United States and in other countries are public companies. This means that the public, that you, can be an owner in the company by purchasing some stocks, or shares of ownership, from the company. Each stock represents a portion of ownership in the company. Each company has a certain number of stocks. When one person owns all of these stocks, then that person has full ownership of the company.

For example, say Jimmy wants to buy stocks in the company Soda Pop. The company Soda Pop has 500 stocks total. If Jimmy buys 250 stocks, then he will have a 50% ownership of the company. If Jimmy buys all 500 stocks, then he will have full ownership of the company. Most times though, people usually hold just a small portion of a company.

How do you purchase these stocks? Each country has its own stock exchange where stocks are sold and bought. Usually, people will go through a stock brokerage company to make sales and purchases on this stock exchange. Yes, people will sell their stocks in companies and buy others. Each stock has a price dependent on how the company is performing.

For example, a big company that is doing really well could have a stock that costs $119 per stock while a smaller company that isn't doing too well may have a stock that is worth only $0.50 per stock. The price you pay depends on the number of stocks you purchase. For the big company that is doing really well, if you bought 5 shares, or 5 stocks, then you would need to pay 119*5 = $595. For the smaller company, you would only have to pay $0.50*5 = $2.50 for the 5 stocks or shares.

In addition to this cost for the stocks themselves, each stock brokerage company also adds a transaction fee, such as $7 per trade. So, if you were buying 5 stocks at $119, your total cost would be 119*5 + 7 = $602. If you were selling 5 stocks at $119, you would earn 119*5 = $595 minus a transaction fee of $7: 595 - 7 = $588.

Why do people buy and sell stocks? The short answer is to make money. Money can be made by selling stocks you have purchased at a lower price.

Dividends

Also, some large companies provide dividends, a share of the profits, to its stockholders. For example, if the company Soda Pop did really well one year and made quite a bit of profit, then its stockholders would benefit as the company gives out dividends based on this profit. For example, each stock may get $1 dividend since the company did so well. If you owned 50 stocks in the company Soda Pop, then you would get a dividend of 1*50 = $50 if you still own the stock at the time the dividends are sent out.

Earnings

Say you have purchased 10 stocks in the company Soda Pop for $10 each. You have spent 10*10 or $100 to purchase these 10 stocks plus any brokerage fees. If your brokerage is $7 per transaction, then you would have spent 100 + 7 or $107 to buy 10 stocks in the company. You hold onto these stocks because you believe in the company Soda Pop. You know that they have a good product and you believe that they will get better.

One year later, the stock price for Soda Pop has increased to $20. Hey, that's a $10 increase per stock since the time you bought it. What does this mean for you? This means that if you sell your stocks in Soda Pop you will earn $10 per stock. If you sold all 10 stocks, you would get 20*10 or $200. With a brokerage fee of $7, you would get $200 - $7 or $193. We subtracted this brokerage since that is the amount you have to pay while the $200 is the money you earn.

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Business 110: Business Math

10 chapters | 78 lessons | 10 flashcard sets

Ch 8. Math for Financial Analysis
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