In Episode 9 of the first season of the Bad With Money podcast, Gaby Dunn asked financial expert Sallie Krawcheck “What is a stock?”, and I began to realize how large the knowledge gap is in financial literacy. That episode was the initial inspiration I had for starting this blog, because I knew I could help explain things to people. 

A stock, also called a share, is a tiny piece of a company pie. Once upon a time, a share was an actual physical piece of paper you could buy. Now, it’s all kept electronically in a computer which enables one share to be a teeny tiny piece of a pie. We call the cost of one piece of stock the share price for a company. The two factors that determine how valuable your piece of stock is, are the share price and the total number of shares, is how many pieces the pie is cut into.

For example, one piece of Apple stock is worth about 0.0000225% of the total company. That’s…not a lot. But let’s take a step back.

If you decide to go and start a business today, you are the sole shareholder of that business. By default you own 100%, which means any money the company makes is yours. However, let’s say you need money to grow the business, and instead of taking out a loan you sell your friend 5% of the company for $50. Come on, we’ve all seen Shark Tank. Those external people now own stock in your business, they get a 5% share. This entitles them to 5% of your profits or losses. We call this an investment because your friend or shark expects to get more money back, to make a return on the money they’re giving you today. If they don’t expect to get money back, we call that a donation. Let’s play out a more in-depth example.

So, let’s pretend you’re a modern day farmer. You start illegally growing tomatoes in your tiny apartment. These tomatoes are good. Like really good. Something in the faulty air conditioning keeps conditions in your building absolutely perfect for tomato growing. So your friends decide you should grow more tomatoes (or whatever Etsy product you have) and sell them. While you’re the only farmer, you get to keep all of the money you make, but you also have to put in all your own money towards the costs to grow the tomatoes. 

Now, let’s say the apartment next to you becomes available to rent. You could dedicate a whole apartment to illegal tomato growing! Even better, you could go back to living in your own apartment! You’d been mostly staying at your boyfriend’s place and using yours for the tomatoes, but you’re getting bored of Tuesday night sports trivia and think you want to break up with him. 

So you go to these friends who insist you have to keep growing tomatoes. You say look, I’d love to get this second apartment and keep growing them, but I just don’t have the money. Can you please help?

They’re willing to give you money, sure. But for a piece of the pie! You negotiate the deals separately. Sally gives you $100 for 15% of your company. Atticus gives you $500! But only asks for 5%, so you only give him 5% and just pray that Sally and Atticus never talk to each other again. Ah dammit they started dating! Now Atticus is pissed but hey, he signed the back of the menu you wrote the agreement on. 

So like, what do get they for their share of the company? They get 5 or 15% of whatever money your company makes. And we just made $600! Right! Wrong. That money doesn’t count as “income”, because you didn’t sell anything to get the money. That $600 goes into a bucket called Equity that everyone pretends doesn’t exist and we’ll never look at that bucket again. 

So what money do they get a piece of?! You sold $10,000 worth of tomatoes at farmers markets this year. Your friends were right, these are really good tomatoes! Sally thinks she gets 5%, or $1,500 back for her $100 investment! Awesome! 

Oh wait, the rent on that apartment? It’s $1,000 a month. That’s $12,000 for the year. So if you made $10,000 in Income, but it cost you $12,000 to make that money, then your net profit is … negative $2,000. You’re friends don’t get any money back. They’re going to be pissed. But wait! Sally still gets her 15%, which is negative $300. Why would she even want that? Because that means she can offset it against $300 of money she made from her real job for tax purposes.

Let’s pretend for a minute that instead of $10,000, you sold $15,000 worth of tomatoes. $12,000 is for paying rent, and you use $2,000 of it to pay yourself. After all, you did spend a year growing tomatoes. You have $1,000 leftover as income. This $1,000 is what your shareholders have a right to. The problem is, if you give everyone back their money, then you don’t have anything left to buy supplies for next year. So you may choose to keep the full $1,000 invested in the business, or pay out a portion of it to your friends in what’s called a Dividend. 

Sally only gave you $100, so she doesn’t mind if you decide to  don’t pay her a dividend. However, Atticus was expecting to get a return for his $500 investment. You tell him it’ll just take a few more years before you can pay a dividend. Instead of waiting, he decides to cash out and sells his share to Sally. 

Since the age of paper stocks, investors began not only investing in companies, but buying and selling the stocks from one another. This lead to the eventual creation of what is known as today’s stock markets. The stock market is, very simply, a place to buy and sell stocks. There’s a bit more information you’ll need to truly understand the basics of the stock market, which next week’s article will begin to delve into.

• Assets
• Finance Basics
• Investments