Before I share the definition of what stocks are, let me paint a picture.
Let’s say you start a company today called Healthwise and you want to raise money. You can crowdfund from family and friends or you can sell stock (also known as equity) to interested investors.
When you sell stocks, you’re selling a part of the company in order to fuel its growth. In return, investors who buy into your company do so with the intention to earn returns.
Jump to:
- What are Stocks?
- How are stocks sold in mutual funds?
- What is the risk involved?
- How to invest in stocks
- How do investors earn returns?
What are Stocks?
A stock is an asset that represents owning a part or fraction of a company and this is in relation to the total equity of the company. The owner of a stock earns returns in accordance with the proportion of the company’s stock they own. For example, if you own 0.3% of a company, your returns will be earned only in relation to the 0.3% you own.
Units of stocks are called “shares”.
It used to be the case that to buy or sell this asset, you had to do so on stock exchanges e.g. The Nigerian Exchange Group, but wealth management has evolved and many processes now favour retail investors.
Now, you can buy stocks directly from the private sales offered by some companies and also through a mix of assets like mutual funds.
How are stocks sold in mutual funds?
Mutual funds are investment arrangements that pool funds from various investors. This pool of funds is then invested in a mix of carefully selected instruments. Stocks are always part of the assets in medium and high-risk mutual funds.
For example, the United Capital Equity Fund on Cowrywise comprises about 60% stocks and 40% money market instruments. So when you invest in this fund, you automatically buy a mix of stocks and money market instruments.
The United Capital Equity Fund has stocks like Mobil, Stanbic, Zenith, Wapco, GTCO and MTNN in it. This means that investing in this one fund gives you access to different companies’ stocks.
What is the risk involved?
This asset type generally involves higher risk than other types of investments as they can increase or decrease depending on the perceived value of the company. However, stocks are still a great asset type as many individual investors enjoy considerable capital growth when they invest in them for the long term.
How to invest in stocks
- You can buy stocks directly from companies that sell to individual investors
- Stocks can be purchased on the stock market
- You can purchase either moderate or aggressive funds on Cowrywise and you will automatically access a pool of different stocks from each fund you invest in.
How do investors earn returns?
Investors buy stocks that they think will increase in value over time. The returns are earned when the price of the stock increases and if dividends are paid.
For example, if investors bought Healthwise when each one cost N50, they will earn returns if the stock price increases to N90. So, if they sell some shares to someone else at N90, they will earn N40 on each stock they purchased. However, as highlighted earlier, if the stock reduces in value, it will also lose money.
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