What it means to buy a company’s stock | Stocks and bonds | Finance & Capital Markets | Khan Academy


Voiceover: Let’s talk a
little bit about what it means to own shares or stock in a company, so shares or stock. I think we all have a general sense, but what I want to do in this video is make it a little bit more tangible to really understand
exactly what you’re buying when you buy a share of stock. So the general sense, and this is exactly what it really is, is when you buy stock or you buy shares, you’re essentially becoming a partial or a part owner of the company. Part owner of company. Just to contrast this with bonds because they’re often kind of used in the same phrasing, “Oh, I’m gonna go buy
some stocks or bonds,” or “I deal with stocks and bonds.” Bonds. Bonds, you become part
lender to the company. Part lender to the company. So, for example, if you buy a, well, I’ll just say a face value bond of, let’s say, it’s $10. Let’s say it’s $1,000, and there’s 1,000 people who do that. Each of you all are lending
$1,000 to the company and since there’s 1,000 of you, you’re lending $1 million to the company. I’m not going to go into detail in that because the focus of this
is going to be stock, but it’s good to keep in mind that they’re very different things. Here, you’re owning the company. Here, you’re lending to the company. So just to make this a
little bit more tangible of exactly what we’re owning, let me draw a simple balance sheet for some company X. So this is Company … Let me do a new color. Let’s say we’re dealing
with Company X right here, and let’s say if we looked
at Company X’s assets, and when we talk about assets, it really is the same thing that we mean in the real world, or in our everyday life when we talk about assets. The things that have value. Things that are going to give us some type of future benefit. A house is an asset because it gives us the future benefit of
being able to live in it and protecting us from
cold weather and rain. Cars are assets because they give, provide us some transportation. Cash is an asset because
it can be exchanged for things we need in the future. All of these … A loan to someone else is an asset because in the future, they will pay us back. A loan to me is a liability, which we’ll talk about in a second, but anyway, let’s just in
the very abstract sense, say this is Company X’s assets. Let’s say that they’re worth $100 million. $100 million, and I’m not going to go into exactly how this number is determined or who’s determining it, or who’s saying this is 100 million, but let’s just say this is, we agree that this is how much their land and their patents and their copyrights and their cash and their buildings and everything else they have is worth. All of the things that
will generate future value. Now, let’s say that Company X has also borrowed some money, and maybe they borrowed
it by issuing bonds, which I will not go into detail on. Let’s say they borrowed some money, and so they owe some people collectively $80 million. $80 million. This could have been a straight debt from a bank, or this could have been via a bond issue. They might have issued, maybe they issued a million bonds, where each of those essentially represent a debt of $80. I won’t go into that too much, but I think you get
the idea of what I mean of part lender, but this is debt. $80 million of debt right here. Let’s say that’s all of their liabilities. There are other liabilities
other than debt, but for simplicity, let’s say that’s their only liability and debt tends to be the biggest. Now, what’s left for the owners? A good way to think about that is what would happen if
this company were sold and the debt paid off. So, if the company were sold and these assets really
are able to be sold for $100 million, you get $100 million. You’d have to pay the debt holders, you’d have to pay off the debt first, so you’d have 100 minus 80, you’d have $20 million
left for the owners. I’ll do that in this other green color. So you’d have $20 million left. $20 million left, and this is called the equity, or the owner’s equity. Owner’s equity. This is completely the same idea as when people talk about
having equity in a house. If I have a $300,000 house, and I still have $200,000
left on the mortgage, then I have $100,000 in equity. It’s completely analogous. You can see, very simply, that assets. I’ll write this down. You’re getting a little bit of an introduction to accounting right here, but assets are going to
always be equal to liabilities plus equity. Because essentially, or
you can view it this way: If you subtract liabilities
from both sides, assets minus liabilities
is equal to equity. This might be a little bit more intuitive. What we have leftover
is always what we own minus what we owe. That is what the owners have. Now, when we say that I’m
part-owner of a company, that means that I have a
piece of this pie right here. This is what I am a
part-owner of, the equity. So, for example, if we have, if there are 2 million shares, so Company X, let’s say
they have 2 million shares, and let’s say that the equity is really worth $20 million. How much is each share worth if we believe all of these numbers? Well, we have $20 million of equity, 20 million of equity
divided by 2 million shares, divided by 2 million shares, which gets us $10 of equity per share. If we believe all of these numbers, and we know that Company
X has 2 million shares, then we would say that
each share is worth $10, and if we like these numbers and if someone is willing
to sell us a share for less than that, we would buy it. If someone was willing
to pay more than that, maybe we would sell it. Just to make all of this a
little bit more tangible, let’s look at an actual
example of a company to show you that I’m not
making all of this stuff up. I got this off of your
traditional financial sources. This is actually from the filings of this unnamed company, and you’ll get extra bonus points if you figure out what this company is, and this is their actual
stock-trading activity, and I just want to draw the same diagram that I drew up here, the same diagram that I drew up here, to really, on this company, so you can kind of see that this actually happens in the real world, so first let’s draw their assets. Let’s say this is Company X, and let’s say these are
its assets right there. Its assets. Let’s go to its balance sheet. This is actually what they reported. This is June 30th, well, we want to take
the more recent date. They’re just trying to compare to what they had before. Let’s look at these, this is some time ago, but it doesn’t matter. We’re learning. This is, we’re not trying to decide whether we want to
invest in this right now. This is a very old financial statement, but let’s just look at
what they’re saying. They have our total assets here. 30 million, I’ll just do in round numbers. $30 million right there, so $30 million. You might be curious about, “Hey, what’s all this
current asset business?” Those are things that are either cash or that can be turned into cash within the next year. So, for example, accounts receivable. That’s money that other
maybe vendors owe them, that they’re going to pay very soon. Inventories, these are
things that they have maybe in the warehouse that they can sell and turn into cash very quickly. Other current assets, maybe that’s stock or some other type of
investment that they could sell and turn into cash. So they have 18 million of current assets, that’s things that they can
turn into cash very easily and very quickly, definitely within the next year. Then you have some property,
plant and equipment. this is kind of that land
and buildings and machinery that I talked about, and then who knows what
these other assets are. Maybe those are trademarks or patents, or who knows what they are? But all in all, they have
$30 million of assets. Now let’s go to the liabilities. They have some current liabilities, 16 million. Current liabilities, just so you know, those are liabilities. These are things that
they have to pay in cash within the next year. It could be debt, it could be payables. They have to pay some other vendors. Who knows what it is? But you can kind of view
it as debt on some level, maybe debt that you have
to pay in the next year. Then the have long-term
debt of 5.5 million. If you add these two up, you get pretty close to about 22 million, so just for simplicity, I’ll
put it over here as 22 million. So this company has 22
million in liabilities. 22 million liabilities. These are their assets, just to get all the labeling right. So what’s left for equity? We’ll just draw it on this simple diagram. We have 8 million left for equity. 8 million left for equity, and actually, they did the
calculation here for us. The exact number is 8.39
or 8.4 million in equity, but this is a nice round
number for us to show. This is real-world stuff
that we’re dealing with, and if you wanted to know, kind of, if you believe these numbers, if you believe that this company’s assets really are worth $30 million, what should you pay for it? Well, then you’re going to divide by the total number of shares, and you’ll see this in
some financial statements, and I won’t go into the details of the difference between
basic and diluted, but the numbers are very, very close, so we don’t have to
worry about it too much. But let’s just say that
this company has 2.7, looks like 2.78 million shares. So if the book value is 8.396. I mean, I wrote 8 here, how much should each of these shares, how much should each of these, and when I say book value, I mean these are their books. According to their books, the equity is worth 8.4 million. If we really believe that the
equity’s worth 8.4 million, how much should each share be worth? Well, we’ll just divide 8.4 million, we’ll just have to divide 8.4 million, 8.4 million. This is actually an 8.4. I wrote 8 there for simpicity. Divided by the number
of shares, 2.78 million. So that’s a million, and that’s a million, and I’ll get a calculator
out for this one right here. So, let’s see, we’re
here doing 8.4 million divided by 2.78 million shares. So according, if we believe these numbers,
if we believe the books, the book value of the shares is about $3.02 per share, so this is $3.02 per share, book value per share. That’s what we should be
willing to pay for this, or what we think a fair price per share of this company is if we think these assets are
really worth $30 million. Now, what are people actually paying for these shares? Well, that’s, we look at this information right here, and we see that the last
trade here was for $2.58, so people are paying a discount to the number we just calculated, so the only reason why people are paying less than that, or someone’s willing to
sell for less than $3, is that someone out there, especially the person selling, thinks that this company really, the assets of this company really aren’t worth $30 million. He or she thinks of the
assets of this company are worth less than $30 million, and maybe they think that
the company’s prospects aren’t as good. They’re product isn’t, the sales are going to go down. Who knows? Maybe the person buying it, maybe they think it is worth $3 a share, and that’s why they’re
willing to pay $2.58 for it because they think it’s going to go up. Just so that we get some
of the other details that we see here, this bid, this bid right here. This is what someone has explicitly said that they’re willing to pay for a share. The ask is what someone
has explicitly said they’re willing to sell a share for. This 52-week range is the range of prices that the shares have sold, so in the past year, these shares sold for as low as $1.20, and that was actually a great deal because they went up, even now, where they’re selling at $2.58. the average volume right here, this is the number of shares sold per day, exchanged per day. The market cap, right here, you’ve probably heard that word before. That’s essentially the market’s sense of what this number really is. We’re saying that the
books of this company are saying this company
is worth $8 million, but the market cap is saying what the equity of the company is worth in the market’s mind, and to get that number, they’re taking the $2.58. they’re taking the $2.58
times the number of shares. Times the 2.78 million shares. If we do that, we’re going to get, let’s see, 2.58 times
2.78 is equal to exactly, well, it’s a little
different than what they had. Maybe it’s a little round-off error, but roughly 7 million in market cap. Like I said before, the
market is not paying $3. It’s paying $2.58, and so the market is
saying that the equity, this piece right here
is closer to 7 million, even though the books are saying that this number right
here is above 8 million. Well, anyway, hopefully
that was a little bit useful and gives you a little bit of a sense of what it actually means to buy shares in a company.

100 Replies to “What it means to buy a company’s stock | Stocks and bonds | Finance & Capital Markets | Khan Academy”

  1. Google a bunch of the numbers: ‘june 30 2009 december 31 2008 current assets cash and cash equivalents 202,656’
    First result: CTI Industries Corporation Reports Second Quarter 2009 – Bloomberg

  2. They get their money back either by selling their shares, so they're no longer owners in the company, or by temporarily selling to others the rights to any appreciation on the stocks they own. This is called "selling a call option."
    Selling one's stock or the stock's call options are only done if the seller believes the stock will decline.

  3. Learn to capitalize the first letter of your sentences, and to use punctuation.
    YouTube is an informal forum, not a spelling exam in the elementary school you're probably currently playing hooky from.

  4. It's also done if the investor needs to cash out for some reason; perhaps they need capital for something else, or if it is their retirement fund and thy want to spend it now that they are retired.

  5. Can you make a video of where you would start to trade stocks? I'm 16 (I assume that you need to be 18 to purchase stocks) so I don't think that it would directly apply to me, but I have always wanted to know for future reference.

  6. you shouldnt have your first comma because the clause that follows is dependent and not independent. dont bite off more than you can chew, bitch

  7. You misidentified the second clause–it's independent. And even if it were dependent, that wouldn't preclude using a comma.
    You can learn more at owl.english.purdue edu/owl/resource/598/01.
    I don't care that your capitalization and punctuation are limited or nonexistent… you've even improved from your first comment. But, given your troll attitude, kindly understand if I vote your comment down, and ignore you henceforth.

  8. "To use punctuation." yeah, thats definitely independent…haha not you looked it up and still come off as an idiot. thats not a sentence by itself genius

  9. Why are all of y'all bashing on him for a single mistake? Grammar nazi much? He knows double the stuff than you do than stfu

  10. Be nice if he would stop repeating everything he says every time he writes it, that is really annoying.  Otherwise, good material.

  11. Thanks Salman! Always super helpful. I might be mistaken but when I look up various major companies, it appears that they're trading several times higher than their book value. Does anyone have any insight in to how that plays in to things? It seems like it's hard to use the book value as an anchor when investing in those companies.

  12. Citi Industries, Q2 2009. 

    http://www.sec.gov/Archives/edgar/data/1042187/000114420409042229/v157438_ex99-1.htm

  13. A house is not an asset but a liabillity. – Assets put money in your pocket. Liabillities takes money from your pocket. – Robert Kiyosaki

  14. i'm 18 and i have nothing to do with accounting because i'm studying in medical industry sector and i want to prepare myself i want to invest once i have enough money to be a minor investor and maybe a major investor learned a lot

  15. Fucking Great Video!!!! So well explained about what a company's share meant. with just 2 questions in my mind:
    1: how does the number of a company's share is determined, in other other word, how did the number 2.78m shares come from
    2: Can a company's share be bought out,? So what happens if the 2.78m share of this company is owned by some people and other investors want to buy more shares of this company, what happens then?

    Thanks for making and uploading this video. Double thumbs up for u!

  16. Im not at all capable of this shit.. people want me to go to college but i know id have to take classes like this, and i hate it so much i dont see the reasoning of doing this when you hate it that much, life is made for much more than this artificial bullshit.

  17. This is the most fucked up explanation specially the last part. how market know what's the true equity of the company is , if company says its 8 million , then market says no its 7 million. Know one
    Knows who is right

  18. If they lied about the lunar landing, what will
    they not lie about? For example, Is the stock
    market, a market, or a giant pricefixing
    scheme, where one agency is the sole seller,
    and sole buyer, of stocks? How is that a
    market? No, but it is a casino, and the house
    alone sets the bid and ask, "quotes". Can you
    obtain a stock certificate and offer to sell it by
    placing an ad in the local paper? If not, then
    how can you say there is a market for stocks?

  19. just wana ask what does Avg Vol ( 3m) mean ? 3months of volume is 3290.16 piece of stock transacted out of the 2.78 M pieces of shares ? meaning for 3 months only 0.00118 % of the outstanding shares is being play around the market ?

    sorry if wrong I hope some one can help

  20. AGREE ! Aashiqon ne toh aashiqui ke liye Taj Mahal bana diya … saala hum ek sandas na bana sake -Biwi paas chahiye toh ghar mein sandas chahiye – Please spread the message to all you tubers.

  21. So how the company calculates the 8m while according to the market it is worth 7? The difference is quite significant. Who determines how much the company can put down as a value of equity?

  22. Why does it have 2.78 million shares and not 100 or 5000 or 2 shares? Is there a reason why the company divides its equity in exactly 2.78 million shares? Or is it irrelevant to know?

  23. Amazing, really helps me understand balance sheets and what Ben Graham is trying to say in his book The Value investor. Much appreciated

  24. Your house and your car are not an asset. An asset is anything that puts money in your pocket. A house is only an asset once you sell it for profit.

  25. Well, Mr. Robert Kiyosaki in his book Rich dad poor dad says that even house is a liability, so is a car…then how come you say its an asset?

  26. You're telling me Apple has an equity of 850B since that's there market cap? I can only imagine their total assets.

  27. I'm 15 btw. A house isn't an asset because every month or so it takes money from you, same as a car for example. An real asset is something that gives you money

  28. Hi, I'm trying to do the math on IBM using your information but it seems like the numbers are not right. Would you mind walking me through it going off the information that yahoo provides?

  29. Thank you. Easy to understand. I related to the housing market when trying to understand the terms and relations here since that is my personal experience.

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