What is a stock and why is it important?
Let us start this discussion with a few examples and analogies. Who do you think are the richest men in the world? Can you identify the two men in the image?
The 1st picture is of Mr. Bill Gates whose net worth is almost $135.6 billion and the second picture is of Mr. Warren Buffet whose net worth is approximately $115.7 billion as on Jan 2022.
This is a crazy amount of money! But the question is do they have this amount in their respective banks? Or Do they have these amounts in their houses, or lockers? The answer is No.
Bill Gates has billions worth of stock in Microsoft and other investments whereas Warren Buffet has put billion worth of stock in a company called Berkshire Hathaway.
We will understand the concept more clearly with an example of a company? Are you familiar with Domino’s Pizza?
When we eat Domino’s pizza, we feel good. We all Love Pizzas! Isn’t it? But have you ever thought, who owns Domino’s? The answer is any one of us can be an owner of Domino’s! But how do we do that.? We do that by buying or owning its company’s stock. Jubilant Foodworks is the master franchise owner in India for Domino’s Pizza. Domino's is one of the most important brands whose franchise is under the portfolio of the company Jubilant Foodworks.
When we purchase company stock we become owners in that company. So how much does it cost to become an owner of Jubilant Foodworks. Well the answer ₹3000.00 ( as on date 1st March 2021)
There are 13.2 Crore shares which are held by various shareholders of this company.
Let’s understand its story in greater detail.
In 1960, Tom and James Monaghan founded ‘Dominik’s’ in Michigan. Later it was revamped to Domino’s. By the late seventies, there were over 200 franchise pizza businesses in the United States. And they were constantly expanding. The company opened the first Domino’s Pizza outlet in New Delhi, India in 1996. In the Indian subcontinent, Domino’s franchise is operated by Jubilant Foodworks Limited. Domino’s has enjoyed enormous success in India, and it has become its second largest market in the world after the US.
Quick service, offering local tastes like Peppy Paneer and Kebab, expanding menus , great offers and use of technologies have been the key variables of their success.
So what does it mean to own the stock of Jubilant Foodworks?
1.You own a percentage of the company.
2.You share a percentage of the company's profits.
Why should you own or buy the stock?
Stocks are nothing but an investment just like a home or an education is. If you buy a home for ₹10,00,000 and sell it in five years for ₹42,00,000, you have made a ₹32,00,000 profit on your investment. Similarly, if you paid ₹20,000 for college tuition and got a better job when you graduate the increase in your salary or higher education is the reward for the investment.
That's exactly why you would buy stocks as well.
When you buy stocks, they can reward you by way of price appreciation and/ or Dividends.
What is Price Appreciation and Dividend?
You might buy a stock for ₹100 today and over the next five years the price of that stock would increase to ₹300 giving you a profit of ₹200 over that time period. This is price appreciation. Look at the chart below of Jubilant Foodworks as how the prices have appreciated over time. You can clearly see that price appreciates for stocks over the long run.
Alternatively, when you own stocks, as discussed earlier you are the owner of the company. So you have a share of the profits earned by the company.
So when a company decides to share a part of its profits to its existing owners or shareholders – it is known as dividends.
Dividends refer to the share of profit or retained earnings which are paid by a Company to its shareholders. The Company may decide to reinvest its profits in business as well without paying dividends. Dividends are decided by the board of directors of the company and it has to be approved by shareholders. Dividends are paid quarterly or annually.
So when you buy stocks you can earn by price appreciation as well as dividends.
Now that we have understood- What is a stock? Next, let us discuss- What is stock market? in the following unit.