Why Should You Invest in Stocks?

The big money is not in the buying and selling, but in the waiting.

— Charlie Munger

Introduction To Stocks

I think it is fair to say that most of us have a general sense of what a stock is. Although it is often quite easy to forget this as you are bombarded with the latest daily stock market buzz words from the hoards of financial media outlets vying for your attention. Phrases like “Margin Calls” and “Total Return Swaps” don’t mean much to the average investor, and in many cases, they shouldn’t.

What Is A Stock?

A stock represents partial ownership of a company. When you buy a stock, you are purchasing a piece of that company. Once purchased, you have a claim on that company’s assets and future earnings.

When a company needs to raise money, there are two main ways to do so. They can take out a loan, but this will mean taking on debt. Alternatively, they can issue stocks. This allows the company to raise money without going into debt by selling shares of ownership, providing investors with a claim on future earnings.

Stocks tend to be more volatile than other traditional asset classes such as bonds and cash equivalents but with this higher risk comes higher potential reward for investors.