What is a Stock?

The entire study and profession of Finance hinges solely upon stocks, so it can quickly seem a bit complicated (Okay, finance also includes bonds, derivatives, and many other financial instruments, but these are all based around the same central premise).

A stock is, quite literally, part ownership of a business. If you had 100% of the stock of a business, you would own the entire business. You would have full managerial control, you would have the final say on all matters related to that business and you would also be entitled to the full profits from that same business.

So what determines a shares price?

If I could perfectly answer that question, I would be the greatest financial analyst of all time, however, there are a lot of common metrics that are used to roughly gauge how much “intrinsic value” a business holds. The easiest way to think about stock pricing is to think about the business as a whole – If you are willing to buy a small piece of the business, you should also be willing to theoretically purchase the whole business since that is what your purchase of a share is truly stating. Therefore, from this viewpoint, we can view a companies value by zooming out to look at the business as a whole.

From that view point, things quickly appear a lot simpler:

Will this business be able to double in value within the next few years?

Is this company consistently able to provide good returns?

Are the leadership team capable of growing the business quickly but also intelligently?

The study of finance, therefore, is where mathematics, economics, psychology, and common sense all must come together to form a consistent investment thesis. Due to the vast complexity of finance, the truly great investors are very rare but, perhaps one day I will see your name be indicted into the Hall of Fame!