What is a stock? Part 1
Someone I admire posted to her blog that she didn't understand stocks at all though it had been explained to her multiple times. She seems to deal well in concrete things, so I tried to think of how someone would think of the stock market in concrete terms. The best I could come up with was that a stock is like a ticket for pie. I couldn't think of a good place to post my explanation, so I'll post it here in several parts. Enjoy!
What is a corporation?
A corporation is an imaginary person invented by people who want to make money. Let's say we have a group of people who have thought of a neat way to make money. If they just get together and start doing it, they're going to run into some problems. Who do the group's customers make checks out to? If the group borrows a lot of money and can't pay it back, who has to sell their house and go broke to pay off the loan? Let's say the group talks to each other and finds out that none of them want to go broke if they can't pay back money. And none of them want to be sued if their products accidentally hurt people. They need somebody to accept the money when good things happen, and to take the blame when bad things happen, so they make up an imaginary person. Let's say they name him "Fred."
How does that work?
Now the government wants to make sure that everybody knows that Fred is imaginary and not a real person, so they require that Fred's name also have the word 'corporation' or 'incorporated' in it (or an abbreviation of that). So the group calls their imaginary person "Fred Co." They go to a government office, file a form, and pay a fee, and Fred Co. is born. Fred Co. is now an imaginary person with real legal rights. Now when the group of people makes a product, they say Fred Co. made it. And when you buy the product, you write a check to Fred Co. And if the product ruins your carpet or something, you take Fred Co. to court. And if the court says Fred Co. has to give you a million dollars, and he's only got twenty bucks, then Fred Co. gives you the twenty bucks and has to disappear as if he never existed. This is good for the group of people that invented this imaginary Fred Co. person because it means that you can't make them sell their houses and go broke just because their product ruined your carpet. Fred Co. can take out loans, rent offices, and hire people. He even has his own "social security" number called a federal tax ID. Now that we're all familiar with Fred Co., we'll just call him Fred for short.
What is a corporation?
A corporation is an imaginary person invented by people who want to make money. Let's say we have a group of people who have thought of a neat way to make money. If they just get together and start doing it, they're going to run into some problems. Who do the group's customers make checks out to? If the group borrows a lot of money and can't pay it back, who has to sell their house and go broke to pay off the loan? Let's say the group talks to each other and finds out that none of them want to go broke if they can't pay back money. And none of them want to be sued if their products accidentally hurt people. They need somebody to accept the money when good things happen, and to take the blame when bad things happen, so they make up an imaginary person. Let's say they name him "Fred."
How does that work?
Now the government wants to make sure that everybody knows that Fred is imaginary and not a real person, so they require that Fred's name also have the word 'corporation' or 'incorporated' in it (or an abbreviation of that). So the group calls their imaginary person "Fred Co." They go to a government office, file a form, and pay a fee, and Fred Co. is born. Fred Co. is now an imaginary person with real legal rights. Now when the group of people makes a product, they say Fred Co. made it. And when you buy the product, you write a check to Fred Co. And if the product ruins your carpet or something, you take Fred Co. to court. And if the court says Fred Co. has to give you a million dollars, and he's only got twenty bucks, then Fred Co. gives you the twenty bucks and has to disappear as if he never existed. This is good for the group of people that invented this imaginary Fred Co. person because it means that you can't make them sell their houses and go broke just because their product ruined your carpet. Fred Co. can take out loans, rent offices, and hire people. He even has his own "social security" number called a federal tax ID. Now that we're all familiar with Fred Co., we'll just call him Fred for short.