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Home What are stocks
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Written by Administrator   
Friday, 27 March 2009 02:24

What are stocks?

In this section you'll find basics about stocks and the stock market.

So what exactly is a stock anyway?

This question might sound so basic it's not even worth mentioning. But for the longest time before I really started to learn about investing, I thought when you bought a stock that money went directly to the company you are investing with. Wrong! So, I think it's worth discussing in brief, just in case there's other people who had the same misconception I did.

When you buy stock in a company on the open stock market, you are buying a share of ownership in that company. Yes, you own a piece of that company! But the money you are investing does not actually go to the company itself. Technically when you buy or sell a stock you are "trading" the stock, meaning you are paying an existing shareholder for his share (or shares) of stock. In other words, you are trading money for stock. The money you invest goes into that shareholder's broker account, and the shares come out of his account and are transferred to you. It's actually a little more complicated than that, but in theory that's all that happens. In fact, all of this is done behind the scenes and you as a buyer or seller of stock don't even have to worry about it...this is all handled by your broker.

The only time you buy a stock and the proceeds go to the company itself is in the case of an initial public offering (IPO) or secondary offering (SPO), or if you do what is called "direct investing" which I will talk about later.

Return to Stock Basics from What Are Stocks

Last Updated on Sunday, 29 March 2009 14:16