What Is a Stock?
A stock is a security that represents fractional ownership in a corporation. When you buy a share of stock, you become a shareholder, which means you own a small piece of the company's assets and earnings. If a company has issued 1 million shares and you own 10,000 of them, you effectively own 1% of the business.
Companies issue stock to raise capital without taking on debt. Investors buy stock hoping the company grows, which pushes the share price higher, and in many cases to collect dividends, which are cash payments made out of the company's profits.
How It Works
Public companies list their shares on exchanges like the New York Stock Exchange or Nasdaq, where buyers and sellers trade throughout the day. The share price moves constantly based on supply and demand, which in turn reflects expectations about the company's future earnings, interest rates, and overall market sentiment.
Shareholders can make money in two ways: capital appreciation, when the share price rises above what they paid, and dividends, when the company distributes profits. Shareholders also typically get voting rights on major corporate matters, such as electing the board of directors.
Example
Suppose you buy 100 shares of a company at $50 per share, a $5,000 investment. A year later, the stock trades at $60 and the company paid $1 per share in dividends. Your shares are now worth $6,000 and you collected $100 in dividends, for a total return of $1,100, or 22% on your original investment.
Of course, the reverse can happen too. If the stock fell to $40, your position would be worth $4,000, a 20% loss before any dividends.
Why It Matters
Stocks are the foundation of public markets and historically one of the highest-returning asset classes over long horizons. They also serve as the currency for much of corporate finance, since companies use their shares to fund acquisitions and compensate employees.
For finance careers, stocks are everywhere: equity research analysts publish buy and sell recommendations on them, sales and trading desks make markets in them, and investment bankers help companies issue them through IPOs and follow-on offerings.
