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Stocks: Understanding Investment Performance

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Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has been teaching math for over 9 years. Amy has worked with students at all levels from those with special needs to those that are gifted.

Stocks are an investment into the shares or ownership of a company and repay the shareholder dividends throughout the year. Learn more about stocks, investment performance, dividends, the role of the stock exchange, and how to calculate earnings. Updated: 10/28/2021

Stocks

Many large companies in the United States and in other countries are public companies. This means that the public — you — can be an owner of the company by purchasing some stock for the company on the stock market. The stock for a company is divided and sold as shares of stock. Each share represents a portion of ownership in the company. Each company has a certain number of shares. When one person owns all of these shares, then that person has full ownership of the company.

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

How do you purchase these stocks? Each country has its own stock exchange where stocks are bought and sold. 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 share while a smaller company that isn't doing too well may have a stock that is worth only $0.50 per share. The price you pay depends on the number of shares you purchase. For the big company that is doing really well, if you bought 5 shares 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 5 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 shares at $119, your total cost would be 119*5 + 7 = $602. If you were selling 5 shares 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.

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  • 0:02 Stocks
  • 2:33 Dividends
  • 3:05 Earnings
  • 4:36 Example
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Dividends

Also, some large companies provide dividends, a share of the profits, to their 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 a $1 dividend since the company did so well. If you owned 50 shares 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 shares in the company Soda Pop for $10 each. You have spent 10*10 or $100 to purchase these 10 shares plus any brokerage fees. If your brokerage is $7 per transaction, then you would have spent 100 + 7 or $107 to buy 10 shares in the company. You hold onto these shares 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 share since the time you bought it. What does this mean for you? This means that if you sell your shares in Soda Pop you will earn $10 per share. If you sold all 10 shares, you would get 20*10 or $200. With a brokerage fee of $7, you would get $200 - $7 or $193. We subtracted the brokerage fee since that is the amount you have to pay while the $200 is the money you earn.

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