Methodology

Investing Basics

Module 2

What is unsystematic risk?

Test your knowledge

What are stocks?

What are stocks?

When you buy a stock, you become a shareholder of a particular company. This essentially means that you are a part owner in that business.

Owning a stock is not exactly the same as owning a business, however, as it is not possible to go to the business and demand to make decisions or to take things for free.

This is the case because most shareholders only own a tiny part of the business and do not have the authority. If an average shareholder went to a business and took something for free, it would be the case that they would be stealing from the other shareholders.

When it comes to making decisions for the business, the exception would be when there is a majority shareholder. As long as they own more than 50% of the business, they can make decisions for the company.

Why stocks go up and down

If you have ever looked at a stock chart, you’ll know that stocks often move up and down. This happens as a result of supply and demand.

When a stock is very popular, there will be few stocks available for investors to buy. If investors are very excited about a company and many people want to invest in it, then the price will go up, as investors are willing to pay even higher price to buy stock.

On the flip side, if investors are not excited about a company, there will likely be a lot of stock available to buy, with very few people willing to buy it. This makes the price of the stock go down.

What makes investors excited about a company are the projects that they are working on and how likely they are to make a profit from their investment.

If a company has a lot of room to grow and is working on projects that have huge potential, then their stock price will become higher and higher over time. If a company has limited opportunities to grow and is not working on anything new, then the stock price will likely decline.

This will be covered in more detail during the Stocks modules.

Stocks & Risk

Stocks are one of the riskiest types of investment, as their value relies on the performance of a business.

If a business performs well and has huge potential for the future, then the stock price will regularly go up. Meanwhile, if a company fails to meet expectations or does not have much potential for the future, then the stock price will go down in value.

What makes stocks risky is that investors do not always have access to key information. Instead, they must rely on the management of a company to make sure that the business is performing well and meeting targets.

Investors will not be aware of the problems that are happen within a company, until it is released to the public. As a result, if something unexpected happens from the viewpoint of an investor, stock prices can decrease sharply.

They would not have any idea that this event would happen, as they do not have access to insider information. Accessing and/or using insider information is illegal in most countries and may lead to a prison sentence.

Although stocks are risky, it is important to remember that they deliver the best returns. Shareholders can achieve potentially unlimited returns, which are far higher than other types of investment.

For example, Tesla delivered a return of 743.44% in 2020, which is significantly higher than the 0.5% that you might earn with a bank account.

Copyright © 2022 Methodology

How much can investor expect to earn from a cash investment?

If an investor lends money to the government, what bills would they buy?

That's wrong - try again!