STOCKING UP ON OWNERSHIP
You are a business owner, twelve years old and need the advice of your best friend to open a lemonade stand.
"I sure hope people buy my lemonade," I said. "I used all my savings in my piggy bank to buy these lemons, supplies and to make this neat sign. The name of my lemonade stand is Old Fashioned Lemonade, Inc."
"That's the risk you take when you own a business," answered my best friend while taking a sip of the lemonade. "Sow-wer! No one will drink this stuff unless you put more sugar in it."
"How's this?" I asked after stirring in a pile of sugar.
My best friend took another sip. "Great! But you have to please the customers not my sweet tooth. If you can sell enough lemonade, you can put all the money back in your piggy bank. Any money you have left over will be your profit."
"But if people don't buy my lemonade....", I said.
"Then you'll have a loss," interrupted my best friend. "Even a lemonade stand is risky."
"Well, I can always drink the stuff," I said. "It's my business, so it's my lemonade."
"I can't argue with that," answered my best friend. "After all, when you own something you have the right to use it and enjoy it's benefits."
"I wish I owned other businesses, too," I added. "Just think if I owned McDonald's Restaurant, I could have a hamburger whenever I wanted and I wouldn't have to pay for it."
"You can become an owner of McDonald's Restaurant," said my best friend, "but that wouldn't allow you to have a hamburger whenever you wanted without paying for it."
"Why not?" I wondered. "If I own the business, then I own the hamburgers."
"Not exactly," answered my best friend. "I know a lot about ownership and businesses and if you want to become part owner of McDonald's Restaurant, all you have to do is buy stock in that company. But many other people have also bought stock in the business. So you are only one of many people who share its ownership. That's why stocks are called shares."
"But I would only eat a tiny share of all the hamburgers," I said. "As part owner, couldn't I eat part of their hamburgers?"
"No," answered my best friend. "McDonald's Restaurant has over 315 million shares of stock. That means that the ownership of every hamburger is really divided into 315 million parts. If you buy one share of stock, then you would own one of 315 million parts of each hamburger."
"That's hard to imagine," I said. "That little bit sure wouldn't fill me up."
"And the same would be true for the company's buildings, stoves, and furniture," continued my best friend. "You would own only one three hundred and fifteen millionths of each thing."
"Well, maybe I could decide how to cook the hamburgers just like I decide how to make my lemonade," I said.
"No, again," said my best friend. "For each share of stock, you get one vote for the company's top managers, or directors. But with so many owners or stockholders voting, you would not have a very big say in what the company does. Actually, managers run the company for you and other stockholders."
"So what would I get for buying a share of stock in the company?" I asked.
"Each share of ownership entitles you to some of the profits the company earns," explained my best friend. "But profit is not a sure thing. Your lemonade stand is an example. You don't know if people will buy enough lemonade to allow you to earn a profit after paying all your costs. The same is true for McDonald's Restaurant."
"Any business is risky," continued my best friend, "because we don't know what will happen tomorrow. Just like you have spent your savings on your lemonade business, a company could spend lots of money researching, designing and developing a product to sell to consumers. The company would pay people for their skills, talents and efforts to produce the goods or services. The company would pay for the water, minerals and raw materials needed to produce the goods or services. And the company would pay for the factories, machines, tools, and other manufactured resources used to produce the goods or services."
"But," my best friend continued, "customers might not like your lemonade or the products of other companies. Or production costs could get way out of line. Success is never a sure thing, so there's always a chance of losing your money. Any business is risky, and someone has to bear that risk. That's what stockholders do as owners of a business."
"Sounds scary," I said. "So why buy a stock and risk losing your money?"
"For the same reason you are selling lemonade," said my best friend. "You think you can earn a profit, so you are willing to take the risk. The possibility of earning a profit gives the owners and managers of a business an incentive to produce something consumers want to buy at a price they are willing to pay. If the business succeeds, its owners will earn a profit. Stockholders will then be rewarded for risking their money. But customers also benefit because they get something they like. And employees of the business benefit because they have a place to work and earn money. It's like they are all on one big team with the same goal. But owners are the only ones who risk their own money on whether the goal is accomplished."
"So by buying a stock," I said, "I become a business owner who takes part of the risk that the company might fail. But if the company succeeds, I will get some of the company's profit. I'd like to learn more about stocks, ownership, and businesses."
