The stock market, as explained by Fritas
Around a corner you might otherwise stroll past on Main Street, there is a set of glass doors between ivory white brick that holds the smallest, most restless Cuban eatery in town. Home to coconut cream milkshakes, community tables, and burgers stacked with eggs, guacamole and fries, Frita Batidos is continuously brimming with culinary enthusiasts from open ‘til close.
As sacred as Fritas has been to Ann Arbor’s savory landscape for the last eight years, it is hard to deny its success. And in a parallel and perfect universe, there would be a Frita Batidos gracing at least one canopy sign in every metropolitan city in the U.S — at least the Michigan alumni could attest to that.
So, what if there was?
Fritas rakes in $8.50 for each burger it so artistically serves, but building out several locations is still a slow and pricey feat. Let’s say they decide to build a couple dozen locations over the next few decades.
In its theoretical expansion, if Fritas funds were to run dry, a way to gain access to millions of dollars is by going public: letting laymen get a slice of the pie (or rather, a bite of the burger). Investors nationwide can purchase a share, or a stock, of Fritas and own a fraction of what once was just the little restaurant down Washington Street. So, needing access to thousands of investors to be able to expand more rapidly, Fritas takes the leap and files to go public.
After a regulatory green light is signaled by Wall Street and the federal government, bankers and attorneys tend to the grunt work. They analyze when to release shares to the public, how much each share will be, and iron out the details. And then, on the little ticker that scrolls robotically across your screen each weekday, FRTA▲14.2% joins the pack.
This “pack” is otherwise known as an index. Like the Dow Jones (DJIA) or S&P 500, an index is made up of tens, hundreds or even thousands of companies that fit certain criteria that can speak to their holistic performance. For example, the S&P 500 is a listing of the 500 largest companies in the U.S. While Frita Batidos could eventually size up to eatery behemoths McDonald’s and Chipotle, it may find itself listed in the Russell 2000 Index: a compilation of 2,000 small public companies that benchmarks small market cap stocks in the U.S.
Now, as an investor with the ability to purchase shares of Fritas, you want to make sure you’re getting the best bang for your buck. Essentially, the mindset to adopt when facing investment decisions is to purchase at a low price in hopes that it will rise over the course you own the share, so you can eventually sell it in the market at a higher price, and pocket the difference.
Think of this like a bet. When you buy a share in a company, you tempt fortune on either the company or macroeconomic conditions to go well for the time period you plan on holding that investment.
Your Fritas investment in action: If you buy a share of Fritas at $20 and its fate turns south, you lose $2 if it sinks to $18.
Don’t bite? If you buy 20 shares of Fritas and things go well — say the share price increases to $25 — you earn $100 without lifting a finger.
This price can go up and down for a myriad of reasons, but fundamentally, it rests on the company’s performance and the market’s appetite for Fritas’ stock. The more that people want to sink their teeth into a soft egg bun enveloping spicy chorizo, the higher Fritas revenue will be. And the higher the revenue, the better off the company’s sustenance. As long as Fritas continues to perform as well as it does on a Friday night here in Ann Arbor, the more investors it will attract.
If you decide to take on the investor role, once you purchase shares in your first company, you have opened the cork to bottomless opportunity. You can pair passion and prognosis to delve into companies whose growth piques your interest. And as you accumulate investments in more companies, you inaugurate the beginnings of a portfolio.
As you begin to piece your portfolio together, it is important to keep diversity at the forefront of your decision-making. While it pains me to report that just 12-15 percent of Wall Street traders are women, I’m referring to another kind of diversity: portfolio diversification. For example, if every Main Street facility was to go public and be listed on the New York Stock Exchange, it is unwise to pour your money into Fritas, bd’s Mongolian Grill and Prickly Pear. Rather, some of your money should be allocated to other industries, such as retail, like Warby Parker or Shinola, or service industries, like Anneke’s Downtown Hair & Company. So if restaurants have a bad week, there’s a good chance some of your other investments had a better week.
Beyond the inner workings of the companies you select, there are greater forces applied to every company on the volatile stock market. While your companies may perform well on their own, the stock market is collectively subject to good and bad news about our towering economy. So, when purchasing shares, it is important to assess the health of our overall economic austerity, as its performance will often trump that of your FRTA holding and other individual companies, and could be the determinant of how much you lose or pocket in your portfolio.
And this, friends, is the stock market as told by your favorite Cuban burger place. Need a soda?