How stocks make you money

Meet Sunny Slice Pizza

Maya opened one pizza shop. Her pizza was so good that the line went out the door. She wanted more shops, but shops cost money: ovens, rent, cooks, delivery cars.

So she sold small pieces of her company to anyone who wanted one. The first time a company does that is called an IPO. Today Sunny Slice Pizza has 20 shops, and the company is split into 1,000,000 shares. Each share trades on the stock exchange for $30.

If you buy 10 shares for $300, you own 10 out of 1,000,000 pieces. That's tiny, but it's real. You're a shareholder, one of the owners.

We'll follow Sunny Slice through this whole level. It's made up, but it works just like a real company.

Two ways owners get paid

1. The price goes up. If the business grows, more people want to own a piece, and the price climbs. Say that in five years each share is worth $45. Your 10 shares are now worth $450. That's $150 more than you paid. (It's only real money once you sell.)
2. Dividends. Some companies share their profit with owners in cash. That's a dividend. Sunny Slice pays $0.60 per share each year. With 10 shares, you get $6 a year. Over five years, that's $30.

Add them up: $150 from the price plus $30 from dividends is $180 on your $300. Everything you got, price gain plus dividends, is called your total return. Here it's 60% over five years.

Why would the price go up?

From day to day, prices move with feelings: news, fear, excitement. You saw that on the charts in earlier levels.

Over many years, though, the price of a stock tends to follow the company's profit. A lemonade stand that sells 100 cups a day is worth more than one that sells 10. If Sunny Slice makes more money every year, its pieces become worth more.

That's why the next lessons look inside the business: what it sells, what it spends, and what it owes.

The other side

• The price can go down. If a new pizza chain opens next door and Sunny Slice sells less, the stock might drop to $20. Your $300 becomes $200.
• Dividends can be cut or stopped any time the company decides.
• Companies can fail. If a company goes bankrupt, the stock can end up worth $0. Owners get paid last, after everyone the company owes.

That's why most investors own many companies, not just one.

Owner, not gambler

A trader might hold Sunny Slice for an hour because the chart looks good. An owner asks a different question: "Will this business be bigger and more profitable in 10 years?" Same stock, two very different ways of thinking. This level teaches the owner's way.

Remember

• A share is a small piece of a real company. Owning it makes you a part owner.
• Owners get paid two ways: a higher price and dividends.
• Over many years, price tends to follow profit. Day to day, it follows feelings.
• Stocks can fall and companies can fail, so nothing is promised.