What are Stocks?

Companies sell stocks to raise capital. Investors buy stock to share in any growth in the company’s value and any profits distributed as dividends. Simple !

Studies show that the average annual nominal return on stocks in the US over the past ~120 years has been 11.5%.  So a hypothetical 10 dollars invested in 1901 would grow to $4.7mn by 2020!


#1. Which of the below statements best describes a "Stock"?

A stock is a fractional share of ownership in a corporation and not a loan to a corporation. Since the value of that corporation can go up or down, it has no fixed rate of return, and it carries risk!

#2. Your friend is saving up to buy a car in a year. Would you advise her to put that money she’s saving for a car in stocks?

Since stock values can fluctuate quite dramatically, stocks are usually not a good means to store money in the short term. A good rule of thumb is that if you need the money within five years, don’t invest it in stocks!

#3. Why would a company sell shares of stock? Select all that apply.

Select all that apply:

Companies sell shares of stock to raise money and so that current owners can profit from a company’s value. But, by selling ownership shares, they relinquish some control of the company’s strategic direction to shareholders, and selling stock can dilute the value of ownership, since the company has more owners.

#4. How do you make money from stocks? Select all that apply.

Select all that apply:

You make money from stocks through dividends and increase in value, selling a stock at a higher value than your purchase price.

#5. How long have stocks in the modern sense been around?

Stocks in the modern sense began when the Dutch East India Company sold ownership shares in 1602 and became the first publicly traded company.

#6. Investing in stocks has unlimited potential upside and limited potential downside.

While the value of a stock can theoretically increase infinitely, owners of stocks will never be held liable if the value of a company becomes negative.

#7. Select all of the below statements that apply to common stocks.

Select all that apply:

Preferred stocks, not common stocks, have preference for dividends.

#8. If you bought a share of Apple stock for $22 on December 12, 1980, at its initial public offering, how much would it be worth today?

A share of Apple’s stock bought at its initial public offering for $22 would be worthy $28,000 today.

#9. When stocks prices are falling, it is referred to as a ____________ market.

A bear market is the common term for when stock prices are falling.

#10. When stocks prices are rising, it is referred to as a _______________ market.

A bull market is the common term for when stock prices are rising. Did you know that a bull statue stands on Wall Street in New York City as a tribute to capitalism?


#11. How do you typically buy and sell stocks?

For most investors, the exchange of stocks is handled by brokers with whom they have an account.