Explaining The Stock Market To A 12-Year-Old Part 1
This article is posted under Investing.
I was reading the newspaper the other day, particularly the stock market section, when the 12-year-old son of a friend asked me what the table of numbers on the page was.
I said that it’s the stock market prices of Philippine companies.
He obviously got curious because he then asked me to explain what the stock market is and why it’s so important that newspapers publish that table everyday.
He’s a smart kid and I know he’d appreciate it if I explained the stock market further to him, but I had to do it as simple as I could. So here’s how it went:
“You know my internet cafe, right?” I began.
“Yeah, that’s your business,” he replied.
“Who owns it?” I asked.
“You.”
“Yes, me and a couple of other people. We’re a company – a private corporation,” I answered. “It’s a private corporation because the owners of the business is limited to only a small group of people.”
“Now some businesses, very big businesses like Jollibee – they’re public companies,” I continued. “That means it is owned by a whole lot of people.”
( Learn the different types of business structures here. )
“How come there are private companies and public companies?” he inquired.
“All businesses usually start out as a private company. Then after a few years, they might want to grow and expand – like put more branches or develop more products. And sometimes, the best way to do that is to sell a part of the company to other people,” I explained.
“So let’s say I want to put a new branch of my internet cafe but I don’t have enough money to do so,” I said. “Then I can perhaps ask your father to invest in the business.”
“Invest?” he was a bit confused.
“Yes, that means I will ask your father to buy a part of the business. And when he does and I receive his money, I can then use that to put up a new branch. But this time, when the business earns money, we three, the original owners of the company, would no longer get all the profit because we have to give your father his share of the income.”
“Because he is already one of the owners of the company,” he says.
( Read a beginner’s guide to investing here. )
“That’s right,” I concurred. “Now what if our plan is to put up hundreds of branches all over the country – your father’s money will not be enough to do that. We need more people to invest in the business. And one of the ways to do that is to make our private company, public. Which means we will be selling part ownership of our business to the public and anyone who wants to become an owner can buy a share.”
“So when that happens,” he concludes. “Your private company now becomes a public company.”
“Yes, that’s right,” I agreed. “And that’s where the stock market comes in. The stock market is a place where you can buy shares of public companies and become a part owner of those businesses.”
“And make money when the business earns, right?” he quipped.
“Yeah, you can say that. But not all public companies give dividends, that’s what you call the income you get as an owner of a public company,” I replied.
“So why would you buy a share from a company if they won’t give you a portion of their profit?” he inquired.
“That’s a very good question!” I exclaimed.
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I’ll give the rest of the conversation in my next post. Be sure to catch part 2 when it comes out by simply subscribing to Ready To Be Rich.
Update: Explaining The Stock Market To A 12-Year-Old Part 2
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Photo credit: Bearman2007
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Welcome to my blog, Ready To Be Rich.
Hi, my name is Fitz and this is my blog.
Just yesterday a friend of mine told me he wanted to start investing in stocks and was asking for advice on where he can learn more about it. Thank you Fitz for starting this series, very light reading, and I’m sure my friend would like reading this and look forward to the next part, just like me!
Nice article Fitz! Admittedly, me myself don’t know much about the stock market and how the hell it works. Everytime I read a newspaper there is a portion on the business column that shows the graphs and numbers of stocks which I often ignores due to ignorance of it. Thanks for feeding me this info and looking forward to your next entry. Advance merry christmas!
thanks for sharing. i’ll now be able to explain this to my own kids.
happy holidays!
rose
Nice explanation Fitz! Hmmm… I wonder how can you explain to as 12 year old what stocks to buy (i.e. P/E ratio, credit ratings, etc.)
Looking forward to your next series of posts. Anyway, I also explained how stock market works. I just don’t know if a 12-year old kid can grasp the concepts on my explanation. However, I tried my best to explain it in layman’s term.
http://www.millionaireacts.com/404/how-stock-market-works.html
Nice blog.. bro, maybe you can explain the stock market to me.. at 42, I still don’t get it.
I would like to thank the author for his marvelous efforts. I always enjoy reading such articles which provides knowledge based information. Regards, Kelle Ureta
Really nice read thanks, I have added this to my Mixx bookmarks.
as always, stock market is one of the best ways to earn lots of money.,;*
thank God, thanks to facebook, thanks to pinoy stock market investor and thanks to you fitz. i just felt like i’m a 12-year old. keep up the good work… c”,)
Hi! Wow this is nice. My ten year old sister is just nearby, maybe I can share this to her na nga e…
Hi Fitz,
Thanks for simplifying it for us. I am currently thinking of how I could explain the stock market to my friends without sounding so technical (because after all, I’m just one step a little higher than a newbie) and I appreciate you putting this together.
Thanks for putting out very helpful information re: finance and investing. I’ve been reading your blog for some months now and it encouraged me to try stock market investing. I plan to invest in the stock market very soon. I’ve already started the process of getting the services of an online stock broker bpitrade (I heard Citiseconline is better but I am overseas and have an account with BPI so it makes it easier for me). For now, I am playing PSE stock trading game to get a ‘feel’ of how it is done before I finally ‘play’ with real money. My question is, why do I get a message such as ‘buying of this stock is not allowed’ when I try to purchase? Any thoughts on this would be appreciated.
thank you so much! I’m learning to it step by step,,I also want to invest in stock market but I know I need to search ,ask and learn more bout this..=) thanks! thanks!
great blog!
ill find more ways to make stock market introduction easier for the general public