Explaining The Stock Market To A 12-Year-Old Part 2

Updated: December 10, 2020

This is Part 2 of the conversation I had with a 12-year-old about the stock market. You can read Part 1 here.

“So why would you buy a share of a company that doesn’t give dividends?” I repeated. “Because they can just suddenly decide to do so.”

“It’s a bit complicated but there is always a possibility that a business can give out dividends in the future and that’s always something that people hope for.”

“But more importantly,” I continued. “One more reason why you’d want to buy a share of a company, even if they don’t give out regular dividends is that there are other ways to make money from it.”

“Really?” the boy was more curious now as before.

“Yes, you can make money by selling your share of the company to others,” I replied. “But first, let me now explain to you what all these numbers in the newspaper are.”

“This table is a list of the public companies in the Philippines and how much a share of that company is worth,” I continued. “For example, if you look at this, you’ll see that a share in Jollibee (stock symbol: JFC) is currently worth around P53. This means if you want to become a part-owner of Jollibee, then you’d have to spend P53 for every share you want.”

“So with just P53 I can become an owner of Jollibee?” he was obviously delighted with that realization.

“Theoretically, yes. But the stock market has rules, depending on the price – there is a minimum number of shares you need to buy. For this price, it’s 10 shares. So that means you’d need to spend around P530 to become a part-owner of Jollibee,” I explained. “Can you still follow me?”

“Yes.”

“Now, let’s say I bought 100 shares of Jollibee today at P53 per share. Then after a few months, the company announces that they’re planning to put up more branches in other countries.”

“That will be great news for me and all those who are shareholders of the company,” I explained. “Because it means that when it accomplishes that goal, Jollibee will be earning more money than ever before – which means the dividends that I might get as part-owner will potentially be large.”

“Okay.”

“Knowing that news, wouldn’t you want to also buy shares of Jollibee?” I asked. “So you can also get dividends in the future and not just me?”

“Yes, of course,” he answered.

“So now, I’m in a very good position to earn. Because you and a lot of other people would want to buy shares of Jollibee, I can decide to just sell my shares. In doing so, I will forego receiving possible dividends in the future, but in exchange, I’ll be able to make some money now,” I explained. “Are you willing to buy my 100 shares for P55 each?”

“Oh, I get it now. You can decide to sell your shares at a higher price than how much you bought it. But what if I want to buy them at the same price as you did, P53” he said.

“You can, but you’d have to find someone willing to sell at that price,” I answered. “And in my case, I would have to find someone who will be willing to buy them at P55 per share.”

“So how would we do that?” he asked.

“Well, you go to the stock market and sort of announce it there. For me, I would also do the same thing. And the people in the stock market will automatically match the buyers and the sellers and process the transactions for us,” I answered.

“And that’s why the newspaper publishes this table every day,” I continued.

“Because people buy and sell their stocks everyday and these numbers tell how much the price of each share was bought and sold. It also says how many shares exchanged ownership, that’s what the number under the volume column means. This table also has a lot of other information on what happened today in the stock market.”

“Okay,” he replied intently.

“The prices change every day. Sometimes it goes up, sometimes it goes down – many factors affect it but at the most basic level – it’s dictated by how people feel about the particular company. When people believe that the company will do good, many will buy shares and the price can go up. But if they feel that the business will do bad, more people might sell their shares and that’s how the price could go down.”

“I see,” he said quietly. He was obviously getting information overload. Moreover, I already saw that my friend was about ready to go and we’d have to leave their house soon. And so I tried to end the conversation with a piece of advice.

“You know, you’re quite lucky. I was able to understand the basics of the stock market when I was in college but you, you already know it and you’re just in high school.”

“Really?” his enthusiastic voice was back.

“Yeah, the stock market is actually an interesting place. And if you take some time to learn more about it, you’ll realize that it’s a good way to make money.”

And with that note, our conversation ended.

Interestingly, as I told my friend about what I and his son talked about, he also became interested and asked me if I can help him learn more about the stock market.

Of course, I said that I would, but he’d have to read my blog for that. πŸ˜€

So if you’re like my friend, who’s interested to learn more about the stock market, as well as other ways to invest and make money, then join him and subscribe to Ready To Be Rich.

20 comments

  1. Another good explanation Fitz! To add more, the minimum number of shares that needs to be bought is is what they “board lot”. However, if it does not met it (i.e. an “odd number of shares”), you can still sell it provided that the stock broker can match your orders.

    Ultimately, the general market rule applies to stock market and that is BUY LOW and SELL HIGH.

    In addition, stock market investors especially young ones should look for “stock market burst” as an opportunity to buy price-beaten yet value stocks.

  2. I was really waiting for this Part 2 before leaving a comment.

    Of all the statements you wrote above, it is about the education of students that I like the most. And I am glad you mentioned that.

    I truly believe people should learn how to make money as young as possible. Unofortunately in school, we are being motivated to be employees.

    Right now, I am doing my best to teach my children how money flows.

  3. Lubbit! Thanks for sharing this, Fitz.

    I was first introduced to stock market when I was in grade school, my uncle would always read the morning paper and he would patiently explain to me the stock market table and how I might be able to gain mooor moonies in the future. But it really didnt get my attention, not until I have read Farnoosh Torabi’s You’re So Money last May.

    And now, I am looking for a mentor to get me onboarded. =) I am so ready to invest but the whole stock market thing is really big Im scared it might eat me alive LOL

  4. Nice Article!…. im always interested to this kind of matter..and also interested to invest on this….the only thing is…i dont know how…and where…Fitz….new year is coming…would you help me out…as starters…

  5. I’m a new subscriber to your blog Fitz and I’m impressed. It’s just what I need to educate myself further on financial matters.

    On this topic: if I’m not mistaken, I think there’s a House Bill proposing to include a lesson on stock markets in the high school curriculum. I agree wholeheartedly. I hope our legislators act fast and approve the bill.

    I’ll be reading more of your blogs. Thanks for sharing your knowledge.

  6. Nice article!

    Goggled about how to stop being lazy and found your website.

    I am lucky to come across this post. I finally understand what does stock market means and I am 24!

  7. hi fitz!
    nice to read ur blogs here. i’m too is interested how to invest money in a proper manner. i’ve had received a big amount of money b4 but i invested it in a wrong investment a so-called networking w/c is not so working. can i ask ur advice on how to join as stockholder?what basically required? thankz…

  8. Thanks fitz for this article. When I asked my teacher how stock market works, I remember her explaining but I could not grasp what she is saying. It is really not clear. But upon reading your article, I was amazed how simple stock market works and how you can earn money thru it.. i love reading ur blog… hope I will learn more about investments on MF, stock markets and real estate.

  9. Wow this site is really helpful. Finally! I got a clear explanation on how stock market works. Im 23 and im plannng to invest my money, I just dont know how and where. I thought bout stock market, but know nothing bout it. Seriously speaking,i’ve been searching on the internet for a clear and easy to understand explanation about stock market,im so glad I landed here. Looking forward to learn more from you Sir!

  10. Thanks, love how you explain it in a very simple yet clear way. Just 1 question that passes through my mind, how do we know if a company giving cash dividen or not?

  11. Hi Yanti. Unfortunately, there’s no way you can know when a company will give dividends. They don’t have a regular schedule, and you just have to wait until they announce it.

  12. Hi there. Very nice articles. Im not familiar with the flow of stock market until recently… I got curious… and interested that’s why I’ve been reading a lot about it…

    Your blog is a nice read. Easy on the eyes and not too technical. A lot of people moves away from technicality because it would take a lot of effort to understand from a not-so-technical person.

    I’m not sure… but your blog’s familiar. Maybe I was able to visit this a year ago (when i was still not into stocks). Good job. Keep it up. This is really a big help to us who wants to invest in the stock market. Thanks for the share.

  13. This is a very good article. I am a Seaman an officer but in 8 years working, i spend my money on my parent’s study for my relative car etc.. but i recently got this articles , i open my account and i started to invest slowly , maybe i will boost it every month. thanks alot.

  14. Wow, so that is how the stock market and investment works. I was 13 (January of last year), when I decided to surf the internet about ways to save more money for my future. I actually never believed that if you’ll be able to be on top for every school year and graduate as a cum laude in your college, you’ll have a better job than the others. I only believed that it will only give you more opportunities but not all opportunities are for better future right? Then I came across a blog, (not this though), I read an article about investing but I never fancied it. When I once met up with my mom in our town, she tagged me along with her at PNB. It’s not my first time to enter the said bank but I wandered around then grabbed something. There was an illustration of three glass jars with increasing coins labeled with three different months. It attracted me then I read it further, only to find out it suggests investments. I then put it back from where I grabbed it. I always considered investing as gambling because there are chances you can increase you money but you might also lose it all right? I then came across your blog a few days ago, I’ve been reading your articles, then I came across this. πŸ™‚ The title encouraged me to. I always wondered about what other children and teenagers do and think about money related matters. That boy would be able to grow his money wisely, I’m telling you. πŸ™‚ Not that much people of his and my age bracket would ask about those things. Most early teenagers would be curious and attentive to such conversations but not much of listening and processing until it bores them. People of my age bracket and younger should read more of articles like this and ask. πŸ™‚
    This one’s the best article I consider at the mean time. πŸ™‚ It changed my perspective about investments. πŸ™‚ I’ve never thought you can sell your shares. I always thought that you only buy slots of shares of companies and it’s on your luck if the company never gets bankrupt. πŸ™‚ Thank you for enlightening my perspective about investments. πŸ™‚

  15. hi..i just want to know what happen to my son share of stocks from jollibee it was given to him year 2001 pa..its a 200 shares of stocks of jollibee

  16. It has been a great joy for me watching the three children my wife brought to our marriage become enlightened about the stock market and the oppertunity we have. The troops first became interested when they asked what I was listening to intently one day when I had a webinar playing on the subject of better option selling methods. They all knew I somehow earned money “from my computer” but did not understand the mechanics of what I do.

    Over time we all looked at charts, option chains, basic market concepts together and slowly the light of understanding started to brighten. On Friday nights when there would be no school the next morning, our young troops will often stay up with me for a while. If we spot a good trade, they are each allowed to place a simple trade like a buy/write or short option sale against a stock or ETF that I own and then follow it until expiration the next week. I update them each day at breakfast or after school about their trades progress. They get to keep each profit on the condition at least half goes into savings.

    We are now working on the concept of the power of compounding your trading account. You collect dividends and in my case option selling premiums. When there is enough free cash, you add new and diversified positions to build your portfolio. At some point, if you choose to, this activity could well become to primary source of income. Our gang saw first hand how we continued to produce income to cover family emergencies and support charities we love during the pandemic crisis of 2020. Our other business ventures were shut down and for a time near the end of the crisis, even my Beautiful Brides academic writing work came to an end. The stock market continued to hand us dividends and regular weekly option premium.

    You can never be fired, you will never face a mandatory retirement age nor will you ever answer to an unreasonable boss. You can just about do these simple trades from anywhere in the world that you have access to the internet. My long time home is literally half way around the world from where we now live in the Philippines. Yeah, I have to get up around 9PM at night to log in. Small price to pay from the financial freedom we enjoy. For me, Owning and trading stocks and ETFs along with regular option selling income ranks high as one of the worlds best jobs. SO, now I have the privilege to pass on these skills to our young troops in the hope that they to will grow their money and always help those in need.

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