What Are Stocks?

What Are Stocks?

Let me tell you straight up: a stock, which you might also hear called an equity or a share, is basically your ownership stake in the corporation that issued it. It's a security that gives you a piece of that company. When we talk about units of stock, we're referring to shares, and these entitle you to a slice of the corporation's profits based on how many you own.

You'll find stocks being bought and sold mostly on public exchanges. These exchanges, along with the stocks listed on them, have to follow government regulations designed to shield investors from fraud. That's the setup to keep things fair.

Key Takeaways

Here's what you need to grasp: a stock proves you own a fractional percentage of the issuing company. Corporations put out stock to get money for running or growing their operations. You've got two primary types—common and preferred. And over the long haul, stocks have historically beaten out most other investments.

Understanding Stocks

Corporations issue stock to pull in funds for their business needs. As a shareholder, you hold stock that might give you a claim on the company's assets and earnings. You're an owner based on your shares relative to the total outstanding ones. Say a company has 1,000 shares out there and you own 100—that means you have a 10% claim on assets and earnings.

But don't get it twisted: stockholders don't own the corporation outright. Corporations are treated as legal persons under the law—they file taxes, borrow money, own property, and can get sued. So, that office full of furniture belongs to the corporation, not you as a shareholder.

This separation protects everyone. Corporate property is distinct from shareholders' property, limiting liability. If the company tanks and goes bankrupt, a judge might sell off its assets, but your personal stuff is safe. The court won't make you sell your shares, though their value might plummet. And if a big shareholder goes broke, they can't touch the company's assets to pay debts.

What Is a Shareholder?

A shareholder is any person, company, or institution that owns at least one share of a company's stock. That's it—simple as that.

What Is Shareholder Ownership?

What you own as a shareholder are the shares issued by the corporation, while the corporation owns its own assets. If you hold 33% of the shares, don't say you own one-third of the company—that's not accurate. You own one-third of the shares, though. This is the separation of ownership and control.

Owning stock means you can vote in shareholder meetings, get dividends when they're paid, and sell your shares to someone else. If you have a majority, your voting power lets you influence the company's direction by picking the board of directors. This is clear when one company acquires another by buying all shares.

The board's job is to boost the corporation's value, often by hiring managers like the CEO. Regular shareholders don't run the show. The real perk is your entitlement to profits, which underpins the stock's value. More shares mean a bigger cut. Many companies skip dividends and reinvest earnings for growth, but that still boosts stock value through retained earnings.

How to Compare Common and Preferred Stock

There are two main stock types: common and preferred. Common stock typically lets you vote at meetings and receive dividends. Preferred stockholders usually skip the voting but get priority on assets and earnings—like getting dividends first and being ahead in line if the company liquidates in bankruptcy.

Companies can issue new shares for more cash, which dilutes existing owners' stakes unless they buy in. They can also buy back shares, which boosts the value of remaining ones for current shareholders.

What Is the Difference Between Stocks and Bonds?

Stocks help companies raise capital for growth or projects. Buying directly from the company in the primary market differs from trading with others in the secondary market. The company gets money from initial issues.

Bonds are different—they make bondholders creditors who get interest and principal back. In bankruptcy, they're prioritized over shareholders for asset sales. Shareholders might get nothing, making stocks riskier than bonds.

How Do You Buy Stock?

Stocks trade on exchanges like Nasdaq or NYSE. After an IPO, they're open for buying and selling. You usually need a brokerage account to get in on it. Prices come from bid and offer, driven by supply, demand, and other market factors.

How Can You Earn Income from Owning Stock?

You make money two ways: dividends and capital appreciation. Dividends are cash from profits—if a company with 1,000 shares declares $5,000, you get $5 per share. Capital appreciation is when the share price rises, like selling at $11 what you bought for $10, pocketing $1.

Is It Risky to Own Stock?

Yes, all investments carry risk—stocks, bonds, mutual funds, ETFs can drop in value with bad markets. Your choices affect outcomes, influenced by market conditions or company moves like expansions or mergers. But historically, stocks have done better long-term than most options.

The Bottom Line

A stock is fractional equity ownership in an organization, unlike a bond which is a loan with payments. Companies issue them for capital to fund projects or expansion. Whether common or preferred, the type affects your rights and benefits as an owner.