Why buy stocks

Broadly, there are two categories of people that buy stocks; investors and speculators.

The latter are mostly interested in buying a stock because they believe they have the skill to detect a mispricing in the stock i.e. they buy the stock at a low price and sell when it goes up. Typically, this is just for a short period of time, say a few days or weeks at the most.

On the other hand, investors buy the stock of a company because they believe in the company’s leadership and growth potential. They expect to earn decent dividend income and some capital appreciation when the stock price rises.

For instance, at its current estimated valuation of c.$69 billion, angel investors in Uber have made as much as 8,000 times their initial investment. An investment of $20,000 in the initial stage of the business would now be worth c.$160 million.

That’s exactly what happens when you purchase stock. You’re buying apart of that company. As a part owner, you’re entitled to claim a portion of the company’s assets and profits. Consequently, the more of a company’s stock you purchase, the larger the proportion of its profits and earnings you can lay claim to.

As an individual investor, what you want to be is an investor and not a speculator.



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