What are penny stocks? I know a lot of y'all don't know and we're going to go all over that and go in the details about everything but before I do that I just want to make something real clear.
I'm going to keep everything as simple as possible because I hate when people use big words just to try to confuse you and sound intelligent and sound educated and just pretty much sound more sophisticated.
I hate when people do that and stop can be a very complex topic it could be a very sophisticated subject so I'm going to do my best to dumb it down and make it very simple so that everybody can understand it because in the beginning when I first started it was hard for me to understand all these different terms and what this means and what that means.
It was tough. I just want to make that clear and get that out there in the open.
I always feared the stock market because I used to think it's too complex. I thought it's not meant for people like me or it's not meant for people like me to understand. I thought it was only meant for smart people that went to Harvard.
I thought it was just too complex for me to ever understand and that's not the truth. Anybody can learn it. It's not that hard. It's pretty simple. It's actually very simple once you understand it and once somebody just breaks it down to you to where you can get it in your terms.
I just wanted to put that out there real quick before we started.
Now, a penny stock is any stock that trades under $5. So, what is a stock? A stock is simply a piece of ownership. It is a company to make it simple to understand.
Why people would own stock in a company? You got to understand that there's two different types of companies. The first is a private company and that's simply a company that's owned by private individuals. For example, let's say that you start one of your companies and you own that company, you get all the profits from it. You don't share with nobody else. That's all yours for you. You do your own taxes. You own that company. That's a private company.
The second type of company is a public company. A public company is pretty much owned by the public, people like me and you. You probably wonder how can people like me and you own the company, how can the public own the company? I'm gonna give you an example, let's take Apple. Since I love Apple, one of our favorite companies. Steve Jobs was a true genius. Apple makes some of the best phones in the world, some of the best laptops. But in order to make those iPhone 6's and those Mac books, it take a lot of money. Let's say that it costs 100 million dollars to make all the iPhones and iPads that Apple makes right now, if they were a private company it might be hard to come up with 100 million dollars especially if it's just them trying to come up with the money so what they do is offer stock in their company to the public. They sell shares of their company. They sell stocks of their company to the public to come up with the money because it's millions and billions of people in the public that can give them the money. It makes it a lot easier for them to raise that 100 million dollars. We'll just say for the sake of this example that Apple needs to raise 100 million dollars, what they will do is issue a certain amount of stocks to come up with that hundred million dollars. For this example we'll set and issued 20 million stocks at five dollars each. We take twenty million times five dollars for each stock and that's 100 million dollars and that's how they'll come up with a hundred million dollars to build all the iPhones and Mac books that they need to build.
Now when me and you buy these stocks at five dollars each that makes us shareholders. That's the name of the people that own the stocks and these companies. They're called shareholders. Apple is happy because now they got all the money that they need to make all their products, they got their hundred million dollars. We got the stock now as a shareholder, we make money when the price when the stock goes up.
Let's say you know everybody is buying it now after we bought it and the demand is going up. Everybody wants this Apple stock, oddly coming up with new iPhones, it's like a hot stock is making everybody want it, so the more that people want it the higher the price will go up. That's how the stock market works. The more that people demand it, the higher that demand is for it, the higher the price will go up.
Let's just say we bought 2000 stocks at five dollars each right now that's going to cost us $10,000. Let's just say a week later or the next day or a month later, whenever, let's just say a week later, that same stock, the same Apple stock is now $10. The price went up to $10 each stock. Remember we had 2000 stocks that we bought at $5, now all the same 2000 stocks times $10 each is going to be 20,000. We doubled our money.
That's why people buy stocks and companies so that they can buy low and sell it high. When a person buys the stock at a low price and sells it at a high price that's called going long. Before I teach you about short selling which is the opposite of going long, I'm gonna teach you all about that in a second, I need to teach you what a broker is because I need you to understand what a broker is before you know how to short sell.
A broker is simply just the middleman. You can't go knock on Apple's door and just say, "hey can I buy some stock from y'all." That's not how it works. As a middleman, a broker is how you buy Apple stocks. For example some brokers are TD Ameritrade, Interactive Brokers, and Sure Trader.
To make it simple, a broker is simply just the place where you go to buy your stock. If you wanted to buy 50 dollars of Apple stock you will go to the brokers website and order it.
I told you going long is buying low and selling high. Short selling is the opposite of that. Short selling is when you make money when the price goes down and most people don't even know that you can make money on the stock when the price goes down. They think you can only make money when you buy it low.
It's a whole another way to make money off of stocks and that's how I made my first ten thousand dollars in the stock market. You bet against companies, you bet that they're going to fail.
When you're betting against this company, you bet that it will fail and that the price of it will go down and the reason that you do this is because most of these stocks are promoted. I'm gonna give you example. Let's say that a nightclub right in order for them to make money. They got to have promoters. They need to have promoters to tell people on Facebook, on Twitter and all that.
If they don't have promoters telling people to come to this club then nobody will come so, so these promoters they get everybody out. They spread the word out. They get everybody to come to this club. This club is popping everything good. Everybody's coming out right, so now, what happens when these promoters stop promoting this club? Nobody's going to come there. No more. What's going to happen is they're not going to make that club profit, its not going to be making no more money. It is the same thing with stocks. Companies pay promoters to promote their stock and when they promote their stock that makes the price of that stock go way high.
When these promoters stop promoting that stock, the price goes way low and that's when we make money because it's pretty much predictable every time. It's pretty once you understand how it works. There are two different types of people in the stock market. The smart people and the dumb people. The dumb people, they buy that penny stock when it gets promoted, they buy it because they want to get rich quick and they don't know that they are buying into that promotion.