Today’s post is going to be short and sweet. Many words have been written on this topic and they don’t seem to have stuck. So today the Handy Millennial would like to try his hand at explaining this fundamental concept in a short and concise manner. But first! a small backstory.
Why are you writing this post, HM?
So this past weekend, the Handy Millennial decided to take up his newest project – building a new computer. His current trusty workhorse put HM through graduate school but is nearly half as fast now as the current generation of PC. It’s time…
To tackle this task, first it was time for some education. So, armed with enthusiasm, the Handy Millennial walked into his LCS. For the uninitiated, that’s Local Computer Store. There you can always count on a money-hungry commission salesman to give you a quick rundown of the latest and greatest. Why not let them schmooze you a little?
So after a little schmoozing, the Handy Millennial has got himself a pretty good idea of what he wants. Processor, check. Motherboard, check. Memory, check. Hard Drives, check. … What else?
Ah! HM will probably need to see what’s going on in that box. Therefore, we need a video card. The Handy Millennial walks over to the video card section… or what was left of it.
- All but the lowest end video cards are out of stock.
- Most video cards are behind a locked case.
- The prices of these video cards are in the upper 3 digits or low 4 digits.
Okay, now this certainly was not the case 8 years ago. What gives?
Two words: Bitcoin Mining
Okay HM: take it away.
What is an investment?
Before we can answer this question we need to start with the basics.
What is a company?
A company is a person or group of persons that are working together for a common goal. If this goal happens to be to make money, then the company is a business.
How does a company grow?
A company typically grows by the efforts of its people and through the leveraging of its resources. So in simple terms, a company’s people use its resources (money, trees, coal, etc.) to be more productive, to do more, and thereby to make more money.
A company can hire people, but where does it get money to pay them?
A company can receive money from selling its work/product (goods or service) or by receiving outside money from an investor.
Then what is an investor?
An investor is someone who provides capital to a company so that it can expand its business.
What does the investor receive in return for the money that he provides?
The investor receives a portion of the company (both profits and responsibilities). More formally, he receives a share of the company.
Finally, what is an investment?
An investment is the money given from the investor to the company so that it can expand its enterprise. An investment is usually found in the form of a share in a company.
How do the investors find the companies?
Simple! They use the stock market. The stock market is the place where an investor can buy or sell shares in companies. Of course, they must be publicly traded.
What does publicly traded mean?
It means that the companies have agreed to receive investment (sell shares) through the public auction house called the stock market.
Why does it matter if a company is publicly traded?
It matters because the stock market enforces certain rules on what a company must tell its investors (everything about its finances) and how often this must happen (4 times per year).
So why is it good that companies have to share this information?
It’s good because it helps to determine how much the portion of the company represented by each share is worth. There are different rules of thumb for this. One common rule is the P/E ratio. P stands for Price, how much you could trade your current share for, and E stands for earnings, how much this share of the company is equal to in earnings.
Lastly, what is not an investment?
Anything you buy where the increase in price is not because of productive labor but simply because others want it more. Example: Bitcoin