The stock market

- [Instructor] Have you ever thought about investing in the stock market? This question is a common one for most people unsure how to save their money. The stock market is a system that enables companies to sell partial ownership in themselves to people, to investors, in exchange for cash. Investors get a way to earn a return on their cash that they want to invest by owning a piece of a company, and companies get cash from investors that help to grow their business more, so it's a win-win for both sides. Common stocks, which are usually just called stocks, are critical to successful retirement because they have, by far, the highest rate of return compared with any other option out there over the last century. Common stock is a certificate that indicates ownership in part of a corporation. When you're learning about stock, you should know that the word stock can be used in different ways. Stock is like a singular version of shares. Shares are pieces of the company. If the company has a million shares of stock, then when you own one share, you own 1/1000000 of the company. When you buy a share, you buy a part or a share of the company and attain ownership rights in proportion to your share of that company, making you a shareholder, also sometimes called a stockholder. So if you own a share of Microsoft, you're a part owner of Microsoft. To help make sure that the company is being run in their best interests, as the owners of the firm, common stockholders get to vote on the most important matters for the company. Common stockholders are entitled to vote on the board of directors and elect those directors and to approve any changes in the corporate charter. Now in the real world, shareholders don't really pick the board themselves. Rather, they just select from a list of nominees chosen by management, kind of like a presidential election, right? We don't pick the president so much as we pick the president from a slate of potential candidates. This opens the door for management-favored boards, which may not always be in the best interest of shareholders so you do want to watch out. Now let's take a look at an example of a real-world stock. I'm here on the stock page for Disney. Now we're using the Seeking Alpha site, but there's many other sites out there. CNBC, nasdaq.com, Yahoo! Finance, and a variety of others. I happen to like Seeking Alpha because it puts all the information in a single, easy-to-access place. In the case of Disney, one thing to note is that the stock pays what's called a dividend. This dividend, shown here, is the amount of cash that shareholders get back from the company every year in profit. In the case of Disney, it's $1.72 paid out over the last 12 months. Essentially, if you owned one share in Disney, you're entitled to $1.72 in profit from Disney. Now that might not sound like a lot, but remember, you get that every year for as long as you own the stock. In addition, the stock should presumably go up over time. There are thousands of stocks like Disney out there, but the price of Disney isn't based on some sort of accounting value. Instead, the stock price for Disney is based on the value that investors assign the company based on how money they think it will earn over time, based on what they think the dividend payouts will be in the future, and based on what they think Disney will earn in cash that helps to grow the company going forward. Now shareholders have the right to the company's income after bondholders and preferred stockholders have been paid. That's where those dividends come from. If the company you bought stock in goes bankrupt, you're typically not going to be fully repaid, but your liability is limited to the amount you have in that investment. That's important because it lets you minimize the risk associated with legal disasters, legal liabilities, like those that afflicted the asbestos companies in the 1970s and the cigarette companies in the 1990s. Those shareholders didn't owe any more money even after big legal judgments were rendered against those firms. Now, you should have a good understanding of the fundamentals of stocks and why you should think about investing in them.