Three things to know about stocks

When you own a stock, you're owning a fractional share of a company. Now, there's three things that I always like to keep people wary of when they buy a stock. The first is, is there's sometimes a perception that the stock prices everything, that maybe a $10 per share stock is truly cheaper than a $20 per share price stock. That is not the case.

When you think about what you're paying for a share of a company, you have to think about what the whole company is valued at. So let's say that there's a $10 per share company, but it has a billion shares outstanding. That means $10 per share times a billion shares, that the company is valued at $10 billion.

On the other hand, there might be another company where the stock price is at $100 per share, but there's only a million shares outstanding. So that would be $100 times a million, or a $100 million company. Now, it doesn't necessarily mean that, let's say, the $10 billion company is overpriced or that the $100 million company is underpriced. What you have to think about is why would you own it?

Well, you would own it because companies generate profits, and in theory, those profits, at some point, are going to come to the shareholders or someone else might wanna buy that company. So for example, that $10 billion company might be making a billion of profit a year, while the $100 million company might be making only $5 million of profit a year.

Now it can get more complex. You might be willing to pay more if the company is growing, if you think that there's going to be something exciting that happens in the future. Now, the last thing I will point out is when you buy a stock, you are buying it from someone else. So it's tempting to look at the stock market as this magical thing that just moves up and down, but it's just people buying and selling shares in these companies.

So if you think you have an edge on someone, you just have to think about, well, why are they actually selling it?