Everyone loves to talk about the investing side of finance. And why wouldn’t they? It sounds super cool and you can make money while you sleep! I love to sleep (if someone could convince my child to sleep, that would help me actually enjoy this portion of my life) and I love having to do very little work to make extra money (as you should also), so what an awesome scenario to enjoy year after year because I have taken the time to have my money invested (instead of spent, or sitting idle). For instance, just looking at my net worth as an example for tracking my wealth gains in my investments, from Nov of 2023 to Nov of 2024, my net worth grew by over $165,000. Some of this gain was due to me investing consistently during the year, but much of the growth was due to the appreciation, interest payments, rental income payments, and dividend payments of my funds, real estate, and other alternative investments. Now, let me point out that this was a very good year for the stock market and real estate, in general, and I will in no way expect such gains next year or traditionally. But the amount of time I personally spent growing that wealth over that 12-month period was minimal in comparison to working my job. That is the power of investing.

But what does “having your money invested” actually mean? What does your money do while it is invested, in comparison to what it does while sitting in the bank? Well, there are tons of different scenarios in which you can “invest” your money, but let us start with the most common and often discussed investment options, which revolves around the “Stock Market” and “Bond Market”. In this post, we will cover what stock investments are to help you visualize what your money is doing.

So, let us start simply, what the heck is a stock? I will give you a few seconds to answer this for me because I know you are quite the brainiac. . .

For all of you who do not know the answer or who are stumbling through a good answer, owning a stock represents you owning a portion of a “Publicly Traded Company”, which is fancy talk for a company (think Walmart) that allows almost anyone amongst the public to buy ownership of the company for possible investment. Stocks are also referred to as “Equities”, because they represent your portion of ownership, just like the equity you have in a home. Most of the people who own equities do so through “funds”, which are just groupings of money designated for a particular purpose (like being designated towards buying stock in all of the top 500 companies in the US). You likely have heard of “Mutual Funds” or “Exchange Traded Funds”, which are some of the funds I’m referencing. If you invest in these funds, ones that are specifically stock funds, you are investing in the fund that owns the stock purchased by the money in the fund, and enjoy the returns or losses those stocks are producing, in total.

Why do companies let the average Joe-Shmoe own part of their company? Because they get your money that you invest! Let us keep using Walmart as an example. If Walmart wants to expand the number of stores they have, or the product lines they have, or they want to do improvements on their stores, equipment, or other things, they have four options:

1. They can spend their own money – If the company is making good profit, they can use some of their profit to cover the costs of these expansions or expenditures. But, just like your income, their profits are capped by the amount that is currently available and coming in. Depending on the costs of the projects or expansions, they may not have enough liquid money to cover everything they want to.
2. They can sell small amounts of ownership of their company, in exchange for money from the sales – This is where the stock market comes in. Since Walmart is a publicly traded company, any Joe-Shmoe can buy small amounts of ownership (stock) in Walmart and Walmart uses the sale of this ownership to fund their projects. It is a win-win, Walmart has more money to fund their company projects and the person or entity that owns the stock makes money when Walmart grows in value.
3. They can borrower money from lenders – Just like you borrow money from a mortgage lender to buy home, companies can get commercial loans to fund projects. This often becomes a lot of extra work for large companies (in comparison to these other options), or may not have as advantageous of terms (in comparison to these other options).
4. They can borrower money from individuals or other companies/governments – This is where bonds come in. A bond is just a loan. If you buy a corporate bond from Walmart, you are loaning Walmart money. They have to pay you back your loan over a certain amount of time, plus interest based on the interest rate negotiated. Once they borrow the money, they have money to complete their projects, but need to pay back the debt over-time.

Since we are talking about stocks, specifically, in this post, I want to make sure I highlight this information. How can you make money while you sleep with investing in stocks? It is because all those people who work over at Walmart, or Target, or Tesla, or wherever you own stock, are working day and night to improve the company they work at. THEY are doing the work, not you. They are putting their blood, sweat, and tears into making the company better (and therefore, more valuable). You bought ownership in the company when it was at a certain price, and as an owner (yes even a super small owner) you get to make money when the company increases in value beyond the price you paid (which most companies are working on all the time because they are continually making improvements and trying to sell more merchandise). You may also, depending on the company, receive “dividends” throughout the year because you are an owner. Dividends, are just extra profit that the company makes that they split up and pay out to their owners. Some companies have a very strong history of paying dividends, while other companies are more heavily focused on retaining that profit to spur faster growth.

But, all-in-all, stocks are just ownership units in a company. The Stock Market is where people can go to purchase ownership in these companies (stock). And, stock/equity Mutual Funds or stock/equity Exchange Traded Funds are just pooling’s of investors (and their money) into a company that is going to invest that money for the investors into the stocks that are designated by the fund (per the funds goals).

Get it? Got it? Good?

Check out this same breakdown except for Bonds in the next post.