What are STOCKS?
A Stock is a share of ownership of the company. As the owner of the stock i.e. stockholder you have hold over companies assets and earnings.
Suppose Ravi is starting a company, “Ravi Bakes”. He needs Rs100,000 but he doesn’t want to borrow from bank. Instead Ravi invests Rs10000 of his own money and finds 9 other investors who are willing to invest Rs10000 each. In return he gives each investor a certificate that represents 10% of his company. Each certificate represents 10% of the company’s assets, the building, the pie pans, and the baking materials and 10 % of any future earnings. After 1 year the company is doing well and the companies total value increases to Rs200,000. This means each share of the company is now worth RS20,000. Rs200,000 divided by 10 equals Rs20000; that’s twice the original share of Rs10,000. The original investor can sell their stock in company to other investors for 100% profit. This is how stock works. Stocks are bought and sold daily on major exchanges (like NASDAQ, NYSE, BSE).
What is Opportunity Cost?
OPPORTUNITY COST is what a person sacrifices when they choose one option over another.
Rajni is a "Sous- Chef" (second in command and direct under the Executive Chef ) at one of the best restaurants in the city. He earns a respectable salary of Rs. 200,000/YR. It’s a good job but he thinks he can do better, so he decides to start his own restaurant called “Rajni’s Restrau”. In the first year he earns only 25% of what he made as a Sous-Chef or Rs. 50,000. The opportunity cost of starting his own business is the other 75% of the income that he would have made if he stayed at his old job or Rs. 150,000. Rajni doesn’t make too much for the first 4 years his restaurant is open and his opportunity costs are high. He earns only Rs. 200,000 instead of the Rs. 800,000 he would have earned if he were at his old job. So his opportunity cost is Rs. 600,000 (Rs. 800,000-Rs. 200,000). Suddenly in year 5 Rajni’s Restrau started receiving great reviews from food credits and earning top rankings (20/30- Food; 28/30- Décor; 29/30- Service) from ZAGAT and MICHELIN. His business is booming and he is making 5 times as much as he made at his old job (i.e. 5 *Rs. 200,000) or Rs. 1,000,000/Yr. He realizes that if he was still working as Sous-Chef his opportunity cost would now be Rs. 800,000/YR (Rs. 1,000,000/YR – Rs. 200,000/YR). Although Rajni sacrificed income and his opportunity cost was high in the short term; in the long run his opportunity cost would have been higher if he had not opened his own restaurant!
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