Think about what you own - your house, your car, your dog, your favorite sweater. What about the big corporation in town? Or the company you've been reading about in the newspaper? Chances are you could be able to own part of those companies, too. When companies are publicly traded (sell shares of their stock on the stock market), they are inviting anyone in the world to be a part owner.

Each share of stock you buy represents a partial ownership of the company. For example, if the corporation in your town has 1,000 shares of stock outstanding (purchased or available for purchase), and you buy 100 shares, you would own 10% of the company. When the company does well, your shares will increase in value, and when the company does poorly, your share value will decrease proportionally.

Think of it on a smaller scale: Your daughter needs $10 to buy the supplies for her lemonade stand, but she only has $9. You give her the extra $1 on the condition that you get 10% of her profits. If she has a great day and makes $20 profit, you've doubled your money ($20 x 10% = $2). But, if the kid down the street takes all her business and she comes home empty-handed, you lose your $1.

Common Stock and Preferred Stock

There are two main types of stocks: common and preferred. Common stock is, as its name suggests, the most frequently offered type of stock in the United States. Holders of common stock are entitled to vote for major policy and management decisions, and the weight of your vote is proportional to your percentage of ownership. So, while you might vote that your daughter offer pink lemonade instead of yellow lemonade to differentiate herself from the kid down the street, you only have 10% of the decision-making power, so you could easily be outvoted.

Holding preferred stock does not entitle you to voting rights, but it does permit you a higher claim to earnings and assets than common stock. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.

So, if your daughter goes out of business and has nothing left but a sticky pitcher, you may be dismayed to find out that your neighbor actually gave your daughter $1 upfront as well, and your neighbor's $1 was a preferred share. So, when it comes time to sell the sticky pitcher on eBay and reclaim your losses, your neighbor will get his $1 back before you do. Meaning, if the pitcher sells for $1.50, your neighbor will get $1 and you will only get 50 cents.

Capital Gains

The way you gain or lose money on a stock purchase is in the sale. If you sell your shares at a higher price than you originally paid, then you make a profit, which is also called a capital gain. But if you sell your shares at a price that's less than what you paid, you will lose money. For example, if your daughter's stand earns $20 profit on its first day and she decides to do it again tomorrow, you could sell your share to your spouse for $2 because you own 10% of her profits. Or, if she only makes $5 profit, you could sell your share for 50 cents ($5 x 10% = $0.50) and lose half of your original investment. And, if she loses everything but the sticky pitcher, your 10% share might not be worth anything.

Strategy

As with any other type of business, it's important to look at the lemonade stand over time in addition to the span of one day.

If your daughter has only one booming day of business, then you'll find it was smarter to sell your share while she was in her peak, but if she learns from her mistakes and increases her business steadily over time, then hanging onto your share long-term would turn out to be a wiser investment.

Whether you trade frequently or hold onto your stocks for years depends on your personal financial goals, investment style and risk tolerance.