What is a stock?

A piece of a company

A company owns things and does things: it has shops or factories, it sells products, and — if it is doing well — it makes a profit. All of that together is worth something.

That worth is divided into equal pieces called shares. If a company has 1,000,000 shares and you hold one of them, you own one millionth of the company. Anyone who owns at least one share is a shareholder — a part-owner, however small the part.

People use two words for this. A share is one piece. Stock usually means the shares of a company as a whole — “Apple stock” — or shares in general — “I invest in stocks”. In everyday talk they mean the same thing.

Why a company sells pieces of itself

A company that wants to grow needs money: to build, to hire, to buy another business. It can borrow it, or it can sell part of its ownership. When a company first sells its shares to the public, it is called an initial public offering, or IPO. After that, its shares are traded on a stock exchange, where anyone can buy them from someone selling.

Most shares you buy are bought from another investor, not from the company. The company got its money when the shares were first sold; afterwards, the exchange is simply where owners change.

What owning a share gives you

• A claim on the profits. What the company earns belongs, in the end, to its owners. It can keep the profit to grow the business, or pay part of it out to shareholders as a dividend.
• A vote. Ordinary shares usually come with a vote at the annual meeting — on who sits on the board, for example. One share is one vote, so a small holder’s vote is small.
• Limited liability. If the company fails, its debts are not yours. The most you can lose is what you paid for the share.

How you make — or lose — money

There are two ways a share can earn for you:

1. The price rises. You buy at one price and later the share is worth more. Until you sell, that gain exists only on paper.
2. Dividends. Some companies pay a part of their profit to shareholders, often every quarter. Many fast-growing companies pay none, and keep every dollar to invest in the business.

The price is not fixed by the company. It is set on the exchange, every second, by what buyers will pay and sellers will accept. Good news can push it up; bad news, or simply more people wanting to sell, can push it down — sometimes far down, quickly.

What a stock is not

A share is not a loan. When you lend money to a company by buying its bond, it promises to pay you interest and to pay you back. A share promises neither. That is exactly why shares have, over long periods, tended to earn more than bonds: their owners carry more risk.

In short

When you buy a share, you buy a small piece of a real business: a part of its profits, a small vote, and the risk that comes with owning anything. Its price will move every day; what it is worth over years depends on what the company actually earns.