Let’s say we are going to invest in "The Widget Company." Widget has been owned privately by the Widget family, although they have offered stock options to their employees for years. Now management wants to expand the Widget business, and so they need to raise additional money called venture capital.
Venture capital is money for new equipment, research and so forth. Rather than take out a loan or issue bonds (known as debt financing), a company can issue stock (known as equity financing).
Widget decides to issue stock since this won’t require that they pay back the money or make interest payments over time as with a loan. Widget is going to "go public" in an Initial Public Offering (IPO) which means that shares in the company will be offered to the public for the first time on the New York Stock Exchange.
Widget is a micro cap company, compared to small cap, med cap and large cap corporations. A company’s capitalization is its existing shares times their price.
Large cap companies like General Motors and McDonalds have capitalization of over $5 billion, med caps are between $1 and $5 billion, and so forth.
Stocks of small cap companies tend to be riskier than large caps, but let’s keep in mind that all companies start off small. Even Microsoft started off in Bill Gates’ garage.
Blue chip stocks are ones in large cap companies. They have been around a long time and have good track records. They are the safest and usually most expensive stocks. New micro cap companies like Widget are the riskiest. They are often the cheapest and called penny stocks.
Widget will offer 100,000 shares in their IPO. If we buy 10,000 shares, we will own 1/10th of the company. Then we will be entitled to 1/10th of its profits. But since Widget is a growth stock, profits will be reinvested into the company rather than put out as dividends to stockholders.
Widget has a ticker symbol on the stock exchange. A ticker symbol is its nickname. Kmart is KM and Disney is DIS. Widget is WGT.
When the price of Widget stock goes up, we can sell our shares and make a profit. We can monitor the price of Widget stock by looking at its listing in our newspaper’s financial pages, on TV or on the Internet.