What is stock or equity?

According to the dictionary definition, stocks are capital paid into or invested in the business by its founders. For exmaple, if you wish to found your own company to sell newspapers, you will have to gather investors, who will inject capital into your company so that you can start to buy equipments, rent office, hire employees, etc. Those people, who buy shares of stocks, are the owners of the company. So what's the difference between stock and equity? Equity in finance refers to the value of an ownership interest in property, including shareholders' equity in a business. In other words, equity means claim on ownership. Stock can be classified into equity but equity does not neccessarily mean stock. For example, equity can be home equity, which is the difference between the fair market value and unpaid mortgage balance on a home. Now that you know what the stock is, let us look at the reasons why you should invest in stock. There are quite a number of financial securities out there including but are not limited to bonds, stocks, derivatives, treasury bills/notes and real estates. All those various fiancial securities have unique characters, which require careful examination of each investment class. Here in this blog, I will soley focus on stocks, which I think is the best investment out there. The reasons are simple. First, stocks have been the best performer over the decades. Let us look at the hard numbers and see what the statistical data tells us. The stock market has returned approximately 10.5 % in comparison with corporate bond's 4.5 %. More over, U.S. treasury returned 3.3 % while inflation also grew at around 3.3 %. So that means if you invested in treasuries, you got nothing after the inflation. Second reason is that investment in stock wiill give you further insight onto derivatives and other complex financial instruements. Although derivatives such as options, futures and swaps require in-depth analysis, they can be used to speculate, which will give higher return than stock. But more importantly, they can be used to hedge. Note that hedging does not mean reduction in risk. Rather it aligns the level of risk with your risk tolerance. In addition to that, there are theoritic artibrage opportunites, which can be exploited to gain risk-free return. All those derivatives will be explored later on this blog. However, let us focus on stocks for now.