Stock
A stock, or share, is a unit of ownership in a company. Shareholders own a slice of the business, can profit when its value rises and may receive dividends, and common shares usually come with voting rights.
Buying a share means buying a small piece of a real business. If the business grows and earns more, the piece usually becomes worth more; if it struggles, the piece can lose value or even become worthless. This entry explains what owning a stock gives you, the two ways stocks make money, the main kinds of stock and the risks that come with them.
- Category
- Trading Basics
- Reading time
- 5 min
- Also called
- Share, Shares, Equity share
- Updated
Stocks in plain words
A stock is a security that makes its holder a part-owner of a company; that is why stocks are also called equities.1
Owners can earn in two ways: the share price can rise, and profitable companies may hand part of their earnings to shareholders as dividends, paid in cash or reinvested in more shares.2
Over long periods stocks have beaten bonds, but their prices swing and can fall sharply, so money needed soon is risky to keep in them.2
How owning a stock works, step by step
A company issues shares
It sells ownership to investors to raise money, often in an Initial Public Offering.
You become a part-owner
Each share is a tiny slice of the business and its future profits.
The price moves
Earnings, news and investor demand push the price up or down. See Market Price.
You may receive dividends
Profitable companies can pay out part of their earnings. See Dividend.
You sell — or keep holding
Your result is the sale price minus what you paid, plus any dividends, minus costs.
Worked examples
Example 1 — Price gain plus dividends
+$420You buy 50 shares at $40 and hold them for two years. The company pays $1.20 a share in dividends each year, and you sell at $46.
| Cost | 50 × $40 = $2,000 |
| Price gain | 50 × ($46 − $40) = $300 |
| Dividends | 50 × $1.20 × 2 = $120 |
| Total return | $420, or 21% before costs |
Shareholders earn from a rising price and from dividends, which can be taken as cash or reinvested.2
Example 2 — A falling share price
−$900You buy 100 shares at $25. Weak results send the price to $16, and you sell.
| Cost | 100 × $25 = $2,500 |
| Sale | 100 × $16 = $1,600 |
| Loss | −$900 (−36%) |
Stock prices can drop a long way, which is why money needed in the short term is risky to hold in shares.2
Example 3 — Common vs preferred in a bankruptcy
Common holders lastA company fails. After creditors are paid, $5 million is left for shareholders. Preferred holders are owed $4 million.
| Preferred shareholders | $4 million (paid first) |
| Common shareholders | $1 million left to share |
Preferred stockholders are paid before common stockholders if the company's assets are liquidated, and their dividends come first too.1
Common vs preferred stock
| Aspect | Common stock | Preferred stock |
|---|---|---|
| Voting rights | Usually yes | Usually no |
| Dividends | Variable, may be cut | Paid first, often fixed |
| In a liquidation | Paid last | Paid before common |
| Upside | Full share of growth | Limited. See Preferred Stock |
Why people buy stocks
Long-term growth
Stocks offer the most growth potential over long periods.1
Income
Income stocks pay steady dividends. See Dividend Yield.
Trading
Short-term traders profit from price swings. See Swing Trading.
Diversification
Stock funds spread money across many companies. See Exchange-Traded Fund and Diversification.
Advantages and disadvantages
Advantages
- Share in a company's growth and profits.
- Highest long-run growth potential of the main asset classes.
- Easy to buy and sell for most listed companies.
- Some stocks pay regular dividends.
Disadvantages
- Prices can fall sharply, even to zero.
- Shareholders are paid last if the company fails.
- Dividends are not guaranteed.
- Single stocks carry company-specific risk. See Idiosyncratic Risk.
Going deeper
Read as far as you need. Each level builds on the one before it.
Kinds of stock
Beginner
Investors sort stocks by style: growth stocks grow earnings faster than average and rarely pay dividends, income stocks pay steady dividends, value stocks trade on a low P/E, and blue chips are large, established firms.1 See Growth vs Value Stocks and Blue-Chip Stocks.
Size: large, mid and small caps
Intermediate
Stocks are also grouped by Market Capitalisation. There are no fixed cut-offs, but small caps are often under about $2 billion, mid caps $2–10 billion and large caps above that.2 Smaller companies tend to move more.
Funds versus single stocks
Advanced
For many new investors, stock funds such as mutual funds and ETFs are a cheaper way to diversify than picking individual companies.2 Owning one stock means carrying risks that a fund spreads across many holdings.
Common mistakes
Treating a stock like a lottery ticket
A share is part of a business — judge the business, not the chart alone.
Putting short-term money in stocks
A sharp fall can hit just when you need the cash.
Owning one or two companies
Concentration multiplies company-specific risk.
Ignoring dividends and costs
Total return includes both. See Total Return.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A stock is a share of ownership in a company.
- Returns come from price gains and dividends.
- Common stock usually votes; preferred stock is paid first.
- Stocks can fall sharply and are riskier than bonds in the short run.
- Funds are an easy way to spread stock risk.
Frequently asked questions
Is a share the same as a stock?
Can a stock go to zero?
Do all stocks pay dividends?
Further learning
- Stock Market Index
How baskets of stocks are tracked.
- Dividend
How companies pay shareholders.
- Market Capitalisation
How company size is measured.
- Bond
The other main building block of a portfolio.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Stocks – FAQs (opens in a new tab) Checked .
- FINRA. Stocks (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.