Stocks

Stocks (also known as 'shares' or 'equity') represent a slice of ownership in a publicly-traded company. When you buy a stock, you're not just purchasing a digital ticker that zips across your screen; you're becoming a part-owner of a real, operating business. This is the single most important concept in value investing. Imagine you've bought a share of Apple Inc. You now own a tiny fraction of every iPhone, every patent, every office building, and a claim on its future earnings. This ownership stake entitles you to two key things: a share of the company's profits, often paid out as a dividend, and a say in how the company is run through voting rights at shareholder meetings. For the long-term investor, thinking like a business owner rather than a trader is the foundational step toward building wealth. You're not betting on a squiggly line; you're investing in the future success of a business enterprise.

Thinking of the stock market as a casino is the fastest way to lose your shirt. A value investor sees it differently. When you buy a stock, you become a business partner. Let's say your friend starts a successful pizza parlor and offers to sell you 10% of the business. You'd analyze the parlor's profits, its location, its reputation, and its growth prospects before handing over your cash. You'd expect a 10% share of the profits going forward. Buying a stock is exactly the same principle, just on a much larger scale. As a part-owner, there are two primary ways you can profit:

• Dividends: This is your share of the company's profits, paid out directly to you, usually quarterly. Think of it as the pizza parlor owner handing you your cut of the monthly earnings.
• Capital Gains: This occurs when you sell your stock for a higher price than you paid. This happens because the business has become more valuable over time—perhaps our pizza parlor expanded to new locations, increasing its overall worth.

If these businesses are so great, why would they sell off pieces of themselves to strangers? The answer is simple: to raise money, or capital. Imagine our pizza parlor wants to open a second location but doesn't have the cash. The owner has two main options:

1. Take on Debt: They could get a loan from a bank. But debt comes with mandatory interest payments, which can be a burden, and the bank gets no extra reward if the new location is a smash hit.
2. Issue Equity: They can sell a stake in the business (i.e., issue stock). This brings in cash without the obligation of fixed repayments. The new investors provide the capital in exchange for a share of the future success. It's a trade-off: the original owner now has a smaller piece of a bigger pie.

Pioneered by figures like Benjamin Graham and his most famous student, Warren Buffett, value investing provides a powerful framework for buying stocks. It's less about predicting market swings and more about methodical business analysis.

This famous Buffett-ism is the core of the strategy. The price of a stock is what it trades for on the market on any given day, driven by news, fear, and greed. The value is the underlying worth of the business, its intrinsic value. A value investor's job is to calculate that intrinsic value and buy the stock only when the market price is significantly lower. This gap between the price you pay and the value you get is called the margin of safety. It's your buffer against bad luck or errors in judgment—the investing equivalent of buying a $100 pizza parlor for just $60.

Not all stocks are created equal. The two main types are:

• Common Stock: This is what most people mean when they say 'stock'. It gives you voting rights and the potential for unlimited growth. If the company hits a home run, your share value can multiply many times over. However, you're last in line to get paid if the company goes bankrupt.
• Preferred Stock: This is a hybrid that acts a bit like a stock and a bit like one of the company's bonds. Preferred shareholders usually don't have voting rights, but they receive a fixed dividend that must be paid out before any dividends are paid to common stockholders. They also have a higher claim on assets if the company liquidates. It's generally a lower-risk, lower-reward option.