What are stocks?

A stock is a piece of a company. A stock represents ownership. The people who own these stocks are called shareholders.

Let's look at an example: If you and your family are going to eat a pie or pizza then everyone will get at least one piece or slice. Out of the eight slices you get only one and your Dad gets two.

You got one/eight or 12.5% of the pizza and your dad got 2/8 or 25%.

Companies work the same way, but instead of 8 shares of stock they could have shares of stock in the millions or even billions.

McDonalds has 797 million shares outstanding. Walmart has 2.9 billion and Facebook has 2.3 billion shares outstanding.

Shares outstanding is a term used to explain the total amount of a company shares on the stock market for shareholders to buy and sell amongst themselves. Shareholders can be people or different types of institutions.

Also, you are not limited by geography when investing, because you can buy stocks from companies around the world.

There are two types of stocks on the market, growth stocks and income stocks.

Companies that see their stock price rise up fast, like technology companies, are growth stocks, for example Facebook and Twitter. These are rapidly growing companies and any income they make is put back in the company for further growth and expansion.

Income stocks, my favorite, are stocks that periodically pay their shareholders a dividend. This is usually quarterly,but it could also be monthly, semi-annually or annually.

The companies who can afford to pay their shareholders income are large well-established companies. like Procter & Gamble or the Pepsi Company.

There are benefits to owning both growth and income stocks. Growth stocks have the potential to increase in value fast, but they are also more volatile and risky. Income stocks on the other hand provide a consistent stream of dividend income but the stock itself might not appreciate in value as fast as a growth stock.

For these two types of stocks there are also two different types of investors, growth investors and value investors.

Growth investors love it when they see their stock price increase in value, also called a capital gain. They are also more willing to take on a greater risk for an even greater reward.

Value investors like analyzing a company's metrics and numbers and are willing to wait until it's the right time to buy shares in a company. Value investors are good at discovering great companies who are consistent performers and are likely to stay consistent in the future based on the product or services they sell in the market they are in.

You might be thinking that to start buying stocks you need to have a ton of money or be a millionaire. That's not true at all, you can start by just buying one share in a company.

While I'm writing this, I saw that the Nike stock is being sold for $60, Coca-Cola for $46 and Twitter for $21. Now this is not an endorsement to buy these three stocks. It's just an example that you don't need to spend thousands to get going.Now with the boring definition complete, let's look at how people get rich with stocks.

The four main ways people can get rich are:

• capital gains
• dividends
• selling short
• options trading

The last two require a bit of skill and work and they are not as passive as the first two.

Capital gains are when your stocks gain in value. The beauty of this is that you do not perform any physical labor it's all passive.

Let's say you bought 10 shares of the $46 Coca-Cola stock on Tuesday so your stocks are worth $460. On Friday the stocks went up to $52.

Your stocks (capital) just increased (gain). Your investment is now worth $520. So, your capital increased by $60. Now if you owned 100 or even 1000 shares that $6 increase would look even better.

With dividends you get rich by constantly buying dividend paying stocks, reinvesting those dividends and you also enjoy the dividend increases from the companies themselves.

With dividends it's more of a Snowball Effect. In the beginning your income is low, but after time it exponentially increases allowing you to live off your dividend income without you ever having to sell your stocks.

Investing to get rich and wealthy should be your long-term goal.