Stocks are shares in a company. When you invest in a company's stock or buy its shares, you own part of a company as demonstrated when Lemo sold half of its ownership or stocks to Tom. If the company makes money, your stock will increase in value. But, just as in short-term investment and bonds, there are pros and cons to stock investments.
Stocks have a long historical track record of
outperforming other investments, such as bank deposits, money-market funds, CDs, bonds,
real estate, and commodities. See the chart below for a comparison from 1945 to 1994.
Stock prices often go up and down. They are never
Comparison of Annual Rates of Return on Selected Investments (%)
Source: Ibbotson Associates Annual Yearbook, Ibbotson Associates, 1995.
Stocks : The Highest Performer Over Time
In the long run, stocks have beaten alternative investments such as bank accounts, bonds, real estate, and commodities. A Chicago consulting firm, Ibbotson Associates, has compiled data to show that stocks are the way to go. As shown in the chart below, stocks, represented by the Standard & Poors 500, doubled the compound annual return of T-bonds issued in 1926.
If you buy a share or shares of stock in a public company, you become a part owner of that company. As a shareholder of one share of Microsoft, you enjoy the same basic privileges and rights as Bill Gates who owns millions of shares.
As a shareholder, you have the privilege to receive quarterly reports and an annual report informing you of the financial health of the company. These reports are just like report cards you receive from school. The quarterly reports tell how much money the company has made or lost and business activities during the reporting period. The annual report is a combination of all quarterly reports and is often printed with fancy charts and photographs. It gives detailed business and financial information about the company. As a shareholder, every year youll be invited to attend the annual shareholders meeting, where you can ask Mr. Gates questions about Microsoft.
In addition, you will have the right to vote for Microsofts board of directors, the shareholders representatives who keep track of the important issues of the company. They will, in turn, hire officers such as Chairman Gates to run the company.
Most companies use a one-vote-one-share system. Even though your one share of Microsoft does not count much against Mr. Gatess millions of votes, the company takes each vote seriously. If you cannot go to the annual shareholders meeting, they will send you an absentee ballot.