What Is a Stock, Really? A Non-Wall Street Explanation

A stock is a small piece of ownership in a real business. That is the whole idea. Everything else you hear about stocks, from tickers to bull markets to hot tips, sits on top of that one fact.

A slice of a company

When a company wants to raise money, one way to do it is to cut itself into many equal pieces and sell some of them to the public. Each piece is a share. If a company has 1,000,000 shares and you own 1,000 of them, you own one tenth of one percent of that company: a tiny share of its buildings, its brand, its future profits and its debts.

Owning shares outright also protects you in one important way. Your loss is limited to what you paid. If the company fails, you can lose your entire investment, but you do not owe the company's creditors a cent beyond that.

Where the price comes from

After a company first sells its shares to the public, it does not set the price anymore. The price is set by the people buying and selling every second of the trading day, in an open auction. At any moment there is a bid, the highest price a buyer will pay right now, and an ask, the lowest price a seller will accept. When they meet, a trade happens and that becomes the latest price.

So a stock price is really a running vote on what people expect the company to earn in the future. It is not a measurement of what the company is "worth" in any fixed sense. Prices move on earnings reports, interest rates, news, fear and optimism, and sometimes for no reason anyone can explain until much later.

How people make or lose money

There are two main ways a shareholder gets paid:

• Price change. You buy 10 shares at $40 each, a $400 investment. If the price rises to $50, your shares are worth $500 and you have a $100 gain. If it falls to $30, you have a $100 loss. The gain or loss is only locked in when you sell.
• Dividends. Some companies share a part of their profit with owners as cash payments. Dividends are a choice, not a promise. A company can reduce or stop them at any time.

What you own, and what you do not

Most ordinary shares carry voting rights on big company decisions, such as electing the board. They also carry a claim on whatever is left if the company is sold or shut down. The key word is left. In a bankruptcy, lenders and other creditors are paid first, and shareholders are paid last, which often means they receive nothing.

Owning a share does not mean you control the company, and it does not entitle you to its products or its cash. You own a claim on its future profits and its leftover value.

One company or a basket?

Buying a single stock concentrates your risk in one business. An index fund or exchange-traded fund (ETF) holds hundreds of stocks in one purchase, so one company failing barely moves your total. Many first-time investors begin with broad funds for this reason. Trading individual stocks, which our courses cover in Track 01, is a skill that takes study and practice.

Words you will hear on day one

• Ticker. The short code for a stock, such as AAPL for Apple.
• Exchange. The marketplace where shares trade, such as the New York Stock Exchange or Nasdaq.
• Broker. The firm you use to place orders.
• Volume. How many shares changed hands. High volume means many people are trading it.
• Bull and bear market. Rising and falling markets over an extended period.

Five questions before you buy anything

1. Can I explain, in one sentence, what this company does and how it earns money?
2. Why do I think the price will be higher later, and what would prove me wrong?
3. How much am I willing to lose on this, and is that an amount I can truly afford to lose?
4. Am I buying because of research, or because of a headline or a friend?
5. What is my plan for selling if it goes up, and if it goes down?

If you cannot answer those, practice first. Most brokers offer simulated accounts where you can trade with pretend money while you learn.

This article is for education only and is not financial, investment, tax or legal advice. Trading involves substantial risk of loss.