What does it mean when people say you should buy shares on the stock market?

The stock market traces it's origins back Four Hundred years, when people wanted to invest in trade with the far east. It was possible to buy an actual share of the stock of goods such as spices, teas or silk. The company would use your investment to build or repair their ships that it would send to the Far East, and then use the rest to invest in buying goods when it got there.

You would literally own a share of the "stock" that the ship would carry back to London or Amsterdam. After the company sold its goods to customers on the street markets, you would be paid a share of the profit.

Investing in the worlds stock markets is largely based on the same theory today. You can buy a share of stock in a company of almost any industry you can think of. Fashion labels to airlines, solar energy to electric cars, even dating apps, weed companies & space travel! By purchasing a small share in a company, you are buying into the income stream of it's future profits. What you are buying is a small share in the ownership of the company.

For example, I own 0.000000042% of Nike. With such a tiny shareholding, I highly doubt they will be naming a shoe after me anytime soon, however it does mean that I own the right to 0.000000042% of the profits that the company decides to distribute to shareholders every 3 months. The best part is that once you receive your share of the profits, you still keep the same percentage share of the company that you owned before. Therefore three months later, you are again paid a dividend of the earnings the company makes in that period.

Real-life example; Imagine that you & 9 friends put $10 each into a lottery syndicate. As a group, the investment is worth $100, which you spend on tickets (Your costs). You own 10% of the total syndicate, so if the $100 of tickets only win a grand total of only $20 prize money, you’ll receive a dividend payout of $2 per person ($20/10=$2).

Now unlike the stock market, this lottery draw was a one-off event. In this case you actually lost $8 on your initial investment (the $2 return - $10 cost = -$8). However the Stock Market is not a one-off event like a lottery draw. The great thing about when you buy a share of e.g. Nike on the stock market is that you receive a share of the profits they make on every pair of sneakers they sell. This return is called a dividend. The dividend is simply the percentage share of the companies profits that they return to shareholders, just like the lottery winnings are distributed to the members of the syndicate.

The main difference is that you also get to keep the “tickets" to play again the next week, and every week in the future until you sell the "lottery ticket" to someone else. As long as you own these shares, you are entitled to a share of the profits that the management decide to pay out to shareholders.

The value of your stocks are simply derived by looking at all the future expected dividend payments that the holder of “the ticket” may receive. But we will go through this in much greater depth in future chapters. And we will also explain why sometimes people invest in companies that have never even made a profit!

For now, just keep thinking that the share of stock that you purchase is like a never-ending lottery ticket, that could keep paying out a return every 6 or 12 months! And to work out why, picture those ships returning from the Far-East, selling their imports on the market and then paying you out a return on your initial investment!