Stock investments are the most widely recognized type of investments. Unfortunately, more recognition leads to more misconceptions, and those misconceptions end up costing people their hard earned money. The following is a great example:
- June 1, 2009 – General Motors (GM) files for bankruptcy protection
- GM stock is automatically worth $0.00
- On July 10, 2009, ~74.8 million shares of GM stock are traded
- GM shares INCREASE in price from $0.837 to $1.14
There is no need to speculate on all the motives or shareholders involved in trading action after GM declared bankruptcy. The fact remains that GM stock was worth NOTHING, and people were still trading it.
- On November 18, 2010, stock in the “new” General Motors trades is IPO’d
- Shares of the “old” GM stock are still worth $0.00
What is a Stock Investment?
“Stocks” are financial assets that allow investors buy a piece of a corporation’s “equity”. This is the reason that you hear refer to stocks as “equities”. Stock investments provide a investors with two aspects of corporate ownership: residual claim and limited liability. For more information, check out my page on stock investments.
In the case of GM, the company had zero equity, so there was nothing to be bought. On the other hand, limited liability protected shareholders from being on the hook for any additional losses after the stock was worth $0.00.
Why Buy Stocks?
Good question…especially when stock markets are falling. You want to buy stocks as a way of increasing the amount of money you have in the future. Whether those increases are capital gains or dividends depends on your investing strategy.
Stock investments come in many shapes and sizes.
- Common verses Preferred
- Small Cap vs Mid Cap vs Large Cap
- Voting vs Non-Voting
- Public Company vs Private Equity
For more information on these choices, please visit my page in Investing in Stocks.