Last week on the Foundations of Financial Freedom, we discussed why passive income is a lie.
Stocks sound complex. And they can be. So, let’s break this down bit by bit as much as I can. Which means this week we are going to focus on one simple question – what are stocks?
Simple Stocks
As simple as it can be put – stocks are units of ownership of a company. Think of how you’ve heard of a small local business where it has multiple owners. Imagine the small business was a big business and it had millions of owners. You own one (1) stock of that big business and then you are now part owner. Sure, you might own 5 dollars of a massive corporate entity. But you legally own it nonetheless. And note, that it doesn’t necessarily mean you have a say in day-to-day operations, but it is similar to a small business owner who “owns” their company but it is really run by some other group of people. That “owner” might not really have a say in how the company is supposed to proceed or structure its work day or environment, but they usually reap the benefits of owning something by being entitled to some kind of voting right, dividends, and capital appreciation, or other financial compensation on the business without necessarily having to be directly involved.
Why Stocks Are Pretty Great
While this is not financial advice, but more so musings of a financial fan, let us imagine a perfect world where you choose a stock you like and you purchase it. We can go through the technical way of literally doing that later, but for now, imagine you chose The Polar Bear Space Exploration Company that I just made up as the company that you want to buy a stock from. And you’ve done nothing else other than choose this company because you like space exploration and polar bears. Great, sometimes I’ve done that. Other people have done that. There is no genuine analysis going on and sometimes that works. Sometimes it doesn’t. Just know what you are getting yourself into.
But, in a perfect world, you buy that single stock, and over the years the price rises faster than inflation and you get some great appreciation and maybe even some dividends. Then at some point before you pass, or, hey, maybe you do want to pass it on, you sell that stock of The Polar Bear Space Exploration Company and you get a nice payday for doing all of maybe 5 seconds of “work”?
That sounds like a dream. Making money for doing nothing? Who doesn’t want that?!
Why Stocks Can Be Pretty Mid
Well, just like last week, I’d like to reiterate that stocks are not truly “passive”. Nothing truly is. Work must be created to get some equivalent or greater value of compensation out of said work. A la physics – energy is neither created nor destroyed, it is simply transformed through different stages of matter.
The transformation of your $5 possibly becoming $500 in 40 years is transformed by someone else doing the work, and plenty of time to grow. For a huge corporation, that’s a lot of someone elses. And because so much someone else is doing work for you, in a way, you may or may not reap the benefits you like to see. And everyone would like to see their $5 turn into $500 tomorrow. So that means it probably won’t happen.
And to be as clear as I can, stocks are not your silver bullet to solve your no money problem. Yes, they have been historically the greatest way of building wealth. Yes, they can give you lots of money for almost zero work on your end. But to get the truly huge benefits of stocks, you need to invest a ton of money.
Most people mention on podcasts that they start seeing true results when they have over $100,000 of today’s money invested. Unless you already have money, then you will not get there tomorrow. And the reason you are probably here is because you, like me, came from not only nothing – but less than nothing.
Please note, that you can and will earn the money needed to invest into stocks and truly see their wealth creation effects. It just simply won’t happen overnight, so instead of trying to search for a lottery ticket, I’d recommend spending your time enjoying your life or planning ways to get out of a subpar situation you are in so that you can enjoy your life. And while doing that, save the money needed for investing when and if you can. There’s no reason worrying about any of this if you are fighting debt, starvation, or homelessness.
Lastly, and importantly, there is no guarantee that the company you invested in will not go bankrupt or have its stock value go to zero in a naturally occurring recession. That means that if you owned $100,000 of just The Polar Bear Space Exploration Company, and they suck at space exploration and implode, and you end up with the same amount of stocks but $1,000 of that company then there’s nothing to be done. You lost money and it won’t magically or scientifically come back with a snap of the fingers.
In finito
Stocks are a unit of ownership of a company. You can buy any company you’d like, such as the imaginary Polar Bear Space Exploration Company. Over time, stocks can be used to build wealth because The Market has historically gone up. However, it is entirely feasible that any individual company that you invested in will go bankrupt or lose their value or simply implode. And then you lose all your money because you had all your eggs in that one basket. Stocks can be pretty great for wealth building, but if you don’t know what you are doing, the stock market can genuinely seem like a casino.
But, what if you had a couple of different baskets of a couple really good eggs?
Next week, we will look into that. They’re usually called index funds or ETFs.
Godspeed,
Dennis