I'm always getting emails from folks telling me how badly they want to make money in the markets.
The problem is that a good many of these readers confess that they are literally just getting started.
So right now, I'm going to begin at the beginning - and show you how to make money in the markets from square one.
Today is all about stocks.
In future columns, I'm going to talk about bonds. After that I'll get into options, futures, and other derivatives (they're easy).
And finally I'll show you how they all - stocks, bonds, options, futures, and derivatives - come together every day.
When it's all said and done, I promise you will understand everything about investing and marvel at how simple it all is.
You'll know more than your friends - even more than most brokers. And you'll start "seeing" the money in the markets.
So, let's get started.
Here are the absolute basics, the things you need to know about stocks...
Investing from Square One
Stocks, traditionally, are "shares" in a corporation. The words "stocks" and "shares" can be used interchangeably. These days you can buy shares or stock in other business structures like limited partnerships and limited liability companies, as well as other entity structures.
But the concept is the same; you're buying shares. For our purposes we're going to be talking about shares and stocks of corporations.
When you buy a share of stock, you are literally buying a share in the equity of that company.
Companies raise money by selling ownership interests to investors and the public. Equity is the business term for an ownership interest. Ownership interests take the form of shares of stock in the company. That's why the words "stocks" and "shares" and "equities" are all interchangeable.
Now let me show you how it all works - using Facebook Inc. (Nasdaq: FB) as an example.
Before Facebook went public in its IPO (initial public offering), it had raised money privately by selling ownership interests in their business to venture capitalists and other institutional investors.
Institutional investors can be public companies or private companies, and their business is to invest large sums of money. Mutual funds are institutional investors, and so are hedge funds and private equity companies and trust departments at banks and venture capital companies.
As Facebook was getting bigger, Mark Zuckerberg, his original partners, and the investors who had given the company money in return for their equity interest in Facebook, wanted to raise more money to expand the business and to "monetize" their investments or create an "exit" for themselves.
Because interest in Facebook was enormous, the company attracted a lot of "inside" investors who put up money to own a piece of the company. Eventually Facebook attracted 500 investors who gave it money in return for equity shares.
Understanding When You Can Buy
There are rules about how many investors a non-public company can have.
A company can "go public" when it wants to sell more ownership interests or shares to more investors after it has reached the 500-investor limit.
That's what Facebook did. The company decided it would offer shares to public investors like you and me and institutional investors.
Now, when a company hits the 500-investor limit, it doesn't mean they have to go public. It can stay private and raise more money from the 500 investors it already has.
But once another investor comes on board, investor 501, the Securities and Exchange Commission (SEC) makes the company publicly disclose its financials.
That's because the SEC says if you have that many investors, they have to be able to see what you're doing with their money and the business.
Once a company's private financials are made public, they almost always decide they might as well "go public" and list their shares on an exchange and let the public buy and trade them.
So the company hires an investment bank to file their "registration" paperwork, an S1, with the SEC and list their shares on an exchange. Facebook listed on the Nasdaq.
Today, anyone can buy shares in Facebook.
And if you own shares, you can sell them in the market. With the IPO, Mark Zuckerberg, his partners, the venture capitalists, and early investors, as well as employees of Facebook who were granted stock, can all sell their shares in the public market. Owners and insiders can "monetize" (turn into cash) their shares and "exit" their early locked-in cash investments by selling their shares when a company goes public.
When a company goes public, it doesn't sell all its equity. It might offer 10% or 20% or maybe 25% of itself to the public. It can offer whatever it wants. The rest of the equity is retained by the original owners and early investors and employees.
There are restrictions on when insiders can sell their stock and filing requirements for when they want to sell.
"Shares outstanding" refers to the total number of shares a company issues - they can be in the millions or billions.
"Float" refers to the number of shares available to trade. A company might have a billion shares outstanding, but it might hold some of those shares itself, so they won't be available to trade, reducing the amount of shares that "float."
That's about as basic as it gets.
Now, it's up to you to ask as many questions, general or specific, as you like. I will answer them all within a week of you posting them here. So, have at it below.
I'm doing this for you. The more you know, the more comfortable you'll be, and the more money you'll make. That's what this is all about.
BTW: I found a great way for you to make big gains on Facebook and other companies reporting their earnings this week. It's a simple trade, and you don't need a lot of investing experience to make as much as a 319% gain in a single day. If you haven't seen this already, take a look now.
We're in peak earnings season, and the next two weeks could be very profitable.