What is a stock and why does its price go up or down?

When you buy a stock you buy a tiny piece of a company. If a company is split into a billion shares and you own ten, you own ten billionths of that business: its buildings, its brands, its cash and, above all, the profits it will make in the future.

Why stocks exist

Companies sell shares to raise money without taking a loan. In exchange, the new partners share the risk and the reward: if the business does well, their piece is worth more; if it does badly, it is worth less. When a company starts selling shares to the public it «goes public». From then on anyone can buy or sell them to other people on a stock exchange.

Why the price changes

The price of a stock is set by buyers and sellers, second by second. If at some moment more people want to buy than sell, the price goes up; if the opposite happens, it goes down. Behind those decisions there are many things:

• The company's profits. This matters most in the long run. If a company earns more money every year, its stock tends to reflect it sooner or later.
• What people expect from the future. Today's price already includes what the market believes will happen. That is why a company can report good results and still fall if even more was expected.
• Interest rates and the economy. When money is expensive (high rates), many stocks fall, especially those of companies that promise large profits far in the future.
• Emotions. In the short run fear and euphoria move prices more than numbers. That is why a stock can drop 5 % in a day without anything important changing in the business.

A famous line by Benjamin Graham, Warren Buffett's teacher, sums it up: in the short run the market is a voting machine (popularity); in the long run, a weighing machine (what the business is really worth).

How you make money with a stock

There are two ways:

1. The price goes up. You buy at $100 and years later it is worth $250. The gain is only real when you sell; until then it is a gain «on paper».
2. The company pays dividends. Some companies share part of their profits with shareholders, usually every three months.

You can also lose: if the company stops growing, takes on too much debt or goes bankrupt, the price can fall a lot or disappear. That risk is why, over the long run, stocks have paid more than keeping money in the bank.

What a ticker is

Each stock has a short code called a ticker or symbol. Apple is AAPL, Palantir is PLTR and Moderna is MRNA. In Mexico's International Quotation System (SIC) the symbol is almost always the same; when it differs it is shown in parentheses, for example SentinelOne is S in New York and S1 in Mexico. Companies can also change their ticker, like Victoria's Secret, which went from VSCO to VSXY.

Growth and value stocks

Broadly you will see two kinds of companies. Growth companies reinvest everything to grow fast and rarely pay dividends; their price depends a lot on the future. Value companies are more mature and stable businesses that make money consistently and often pay part of it out. In how to analyze a company you will see what to look at in each case.

What matters to get started

• A stock is a piece of a real business, not a number on a screen.
• Its price moves every day; what matters is what the business does over several years.
• Buying several companies, little by little and for a long time, reduces the risk of being wrong about one. That is what the Viernes de Invertir exercise shows: a small purchase every week for a year.