ELI5 The stock market

Fellow Redditors, this is a topic I have been meaning to touch on for a while now. It’s an important concept to know when it comes to your money and the financial system that surrounds us. I’m not a professional advisor of any kind, nor am I telling you that you **should** invest or **not** invest.<br><br>I wrote this piece for educational purposes only, and if you have any questions or topics you would like me to touch on leave them in the comments below. <br><br>When you invest money in the stock market what you’re doing is this. <br><br>Let’s say there are two kids who have lemonade stands. The first kid is incredibly lazy and doesn’t even have a lemonade stand yet. He knows exactly how he wants it, but he hasn’t even gotten the supplies yet. But because he’s such a smooth talker, he’s able to convince you that his lemonade stand is going to be the best in town, and he wants you to invest in it. You hand him $20, and in exchange for that, he hands you a piece of paper that says you now own a portion of his business. <br><br>Fast forward a month, the kid still hasn’t gotten his supplies nor has he even started building his lemonade stand. But because the kid is so smart, he realized that he could get other kids at school to give him money for pieces of paper as well. So now he has about 5 pieces of paper that he’s written on, and he’s calling those his company’s stock. <br><br>The second lemonade stand has been around for about 3 or 4 years. The kid who runs it is very smart as well. Every time you see him, he’s always trying to expand his business. He went from a small table and umbrella, to a full on stand like you’d see at a baseball game. The first kid with the lemonade stand hasn’t even started to build his. <br><br>If you wanted to invest in the second kid’s business, you can, but it would be much more expensive than it was to invest in the first kid’s business. Also, the second kid doesn’t need your money as much because he’s already so well-established. Even though it would be more expensive, you’d be more likely to make a return on your investment from the second kids business than you would be the first. <br><br>Now imagine millions of kids with lemonade stands. <br><br>The stock market is like a massive school with millions of kids who are all trying to make money by selling lemonade. You decide which kids you think can make the most money by selling lemonade, and you invest your money into them. <br><br>When you buy stocks, you’re not physically buying a piece of a company, but rather you’re betting on the future of that company. <br><br>Imagine you bought Apple stocks back in the 80s. You were able to buy their stocks for under $1. Now today, those stocks are worth over $100 per stock. <br><br>If you invested $100 back then, you would now have over $11,000. <br><br>But back to the lazy boy with the lemonade stand. Imagine you gave him $20, and you got 100 stocks from him. You go back to him in a month, and he still hasn’t done anything. Because so many kids at school invested in his lemonade stand, there’s more stocks than there are kids trying to buy them. So in order to get kids to buy his stocks, he has to make them cheaper. Before you could buy one of his stocks for a $1. Now you can buy them for just 50 cents. <br><br>You would be what we call “breaking even” at 50 cents. You would need to buy two stocks to make $1. You initially paid $1 per stock, so in order to make all of your money back, you would need to buy two stocks at 50 cents each. <br><br>If you look back at your stocks, you gave him $20, and you bought 100 stocks for $1 each. Now that each stock is worth 50 cents, your $20 investment is now only worth $10. You just lost half of your money, and the only way to make it back would be to buy more stocks at 50 cents each until you break even. <br><br>But when you buy more stocks, you’re sinking even more money into the lazy boy’s failed business. This is what we call a “bad investment.” <br><br>I know that was a lot to take in, but now you know how the stock market works.<br><br>Until next time folks, stay smart and always keep on learning.