Monday, June 9, 2008

What does it mean to invest? I define it as purchasing an asset for a set price with the expectation that the value will increase beyond the original purchase price.

There are many different types of assets to buy. One could buy houses, businesses, stocks and bonds. These are just a few examples, not an exhaustive list.

Our focus will center around buying and selling stocks. But first we must define what a stock is. A stock represent an ownership percentage of a particular company.

For instance, let's pretend that I own a toy manufacturing business. No one has contributed any money to my company, so I'm the sole owner. My toy company is profitable and growing fast. My friend Vince invest in my business, but he doesn't want any of the responsibility of running the business.

I decide to sell 50% of my company to Vince for $250,000.00 and I now own half. Think of ownership as a pie. Initially, the pie represented 1 share (100 percent) of my toy company, I owned the whole pie. After the sale to Vince, the pie is split into two equal slices or shares. Each share representing equal amounts of ownership, 50% a piece or 2 shares.

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