Introduction to Stocks
Learn what stocks are, how they work, and the basic math behind buying and selling shares.
Definition
- Share: One unit of ownership in a company
- Stock Price: The current cost of one share (changes constantly)
- Portfolio: All the investments you own together
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Worked Examples
Emma wants to buy 15 shares of a tech company. Each share costs 42 dollars. How much will she spend in total?
Identify the values
Number of shares = 15, Price per share = 42 dollars → 15 shares at 42 dollars each
Multiply shares by price
→ 630 dollars
Write the answer
Total investment = 630 dollars → Emma spends 630 dollars
Answer: Emma will spend 630 dollars to buy 15 shares.
Common Mistakes
Confusing number of shares with total value
Why it's wrong: Owning 100 shares sounds like a lot, but if each share costs 5 dollars, your total investment is only 500 dollars. Someone with 10 shares at 200 dollars each has invested 2000 dollars.
Correct: Always multiply: Total Value = Number of Shares × Price per Share
Calculating percent return using wrong base
Why it's wrong: Return should be based on your initial investment, not your final value.
Correct: Percent Return = (Gain ÷ Initial Investment) × 100, NOT (Gain ÷ Final Value) × 100
Thinking a stock drop of 50% followed by a 50% rise means you break even
Why it's wrong: If you invest 100 dollars and lose 50%, you have 50 dollars. A 50% gain on 50 dollars gives you only 75 dollars!
Correct: Percentages are always calculated on the current value, not the original. You need a 100% gain to recover from a 50% loss.
Interactive Visual
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Stock Price Over Time
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Practice Problems
15 problemsWhat is a stock?
Why It Matters
- Growing Money: Historically, stocks have grown about 7-10% per year on average over long periods
- Retirement: Most retirement accounts (like 401(k)s) invest primarily in stocks
- Financial News: Stock prices are discussed daily in news and affect the economy
- Career Skills: Many jobs in finance, business, and technology involve understanding stocks
Real World Applications
Building a Portfolio
Investors spread their money across different stocks to reduce risk. This is called diversification.
Example:
A portfolio might include: 10 shares of a tech company at 150 dollars each (1500 dollars), 25 shares of a retail company at 40 dollars each (1000 dollars), and 50 shares of a bank at 30 dollars each (1500 dollars). Total portfolio value: 4000 dollars.
You have 1000 dollars to invest. You buy 20 shares of Company A at 25 dollars each, and spend the rest on Company B at 10 dollars per share.
How many shares of Company B can you buy?
Step 1: Write the mathematical expression
Calculate remaining money, then divide by share price:
Stock Market News
When news says a stock is up 5% or down 3%, this refers to the change in price from the previous day's close.
Example:
If a stock closed at 80 dollars yesterday and is up 5% today, the new price is: 80 × 1.05 = 84 dollars.
A stock closed at 120 dollars yesterday. Today it dropped 8%.
What is the new stock price?
Step 1: Write the mathematical expression
Multiply by (1 - percent decrease):
Dividends
Some companies pay dividends - regular payments to shareholders from company profits.
Example:
If a company pays a 2 dollar dividend per share and you own 100 shares, you receive: 100 × 2 = 200 dollars.
A company pays a quarterly dividend of 0.75 dollars per share. You own 80 shares.
How much do you receive in dividends per year?
Step 1: Write the mathematical expression
Calculate quarterly payment, then multiply by 4:
Key Takeaways
- 1A stock is a share of ownership in a company
- 2Total investment = Number of shares × Price per share
- 3Profit/Loss = Current value - Initial investment
- 4Percent return = (Gain ÷ Initial investment) × 100
- 5Diversification means spreading investments across different stocks
- 6Dividends are payments companies make to shareholders
Frequently Asked Questions
Glossary
- Stock
- A share of ownership in a company; also called a share or equity
- Share
- One unit of ownership in a company's stock
- Portfolio
- All the investments (stocks, bonds, etc.) that a person owns
- Dividend
- A payment made by a company to its shareholders from its profits
- Return
- The gain or loss on an investment, often expressed as a percentage
- Diversification
- Spreading investments across different stocks to reduce risk