🧩 What a stock is: owning a slice of a business

🎯 In 30 seconds: A stock is a piece of ownership in a company. If a company is split into 1,000,000 shares and you own 100 of them, you own one ten-thousandth of that business. You make money two ways: the share price goes up, or the company pays you part of its profits as a dividend. You can also lose money, all of it in the worst case. Everything else in this course builds on that one idea.

Start with a pizza shop

Picture a pizza shop owned by one person, Maria. She owns 100% of it: the ovens, the lease, the recipes, the bank account and the profit at the end of the year.

Maria wants a second shop but does not have the money. So she splits the ownership of her business into 100 equal pieces and sells 40 of them to friends for $1,000 each. She now has $40,000 to open the new shop, and she still owns 60 pieces.

Each of those pieces is a share. Anyone holding a share owns part of the whole business, both shops included. If the shops do well, each share becomes worth more. If they fail, the shares can become worth nothing.

A public company like an airline or a software maker works the same way, just with far more pieces. Large companies have hundreds of millions or billions of shares, and anyone with a brokerage account can buy some.

In the drawing the business is split into ten slices to keep it readable. With ten slices, each of the four sold slices would go for $10,000. The idea is identical with 100 pieces or 3 billion.

What owning a share gives you

• A claim on profits. When the company earns money, part of it belongs to you in proportion to your shares. The company can pay it out as a dividend or keep it to grow the business, which should make each share worth more over time.
• A vote. Most common shares come with one vote per share at shareholder meetings, for things like electing the board of directors. Some companies have special share classes with extra or no votes, so check before you assume.
• Limited liability. If the company goes bankrupt, you can lose what you paid for the shares, but creditors cannot come after your savings or your house. The most you can lose on a plain share you bought outright is 100% of what you put in.
• A place in line, at the back. In a bankruptcy, lenders and bondholders get paid before shareholders. Common shareholders are last, which is why they often get nothing.

What a share does not give you: the right to walk into headquarters and tell people what to do, a say in daily decisions, or any guarantee of a return.

The two ways you make money

1. The price goes up (capital gain). You buy a share at $50. A year later it trades at $60. If you sell, you made $10 per share, a 20% gain, before taxes and costs.

2. The company pays dividends. Many established companies send part of their profits to shareholders in cash, often every quarter. If a $50 stock pays $0.50 per quarter, that is $2 a year, a 4% dividend yield. Many fast-growing companies pay no dividend at all and reinvest everything.

Your total return is both added together. Over long stretches, dividends have been a large part of what stock owners earned, which is why serious comparisons use total return, not just price.

The same example can run backwards. If the stock fell to $35, you would be down $300 on price, and the $40 of dividends would not come close to covering it.

Price is not the same as value

A share price is simply the last price at which a buyer and a seller agreed to trade. It moves every second during market hours because people keep changing their minds about what the business is worth.

A $500 stock is not more expensive than a $20 stock in any useful sense. What matters is the price compared with what the business earns, and how many shares exist. That is why traders and investors look at market capitalization:

Company B is eight times larger, even though its share price is a twenty-fifth of Company A’s. You will learn the tools for comparing price and value in Valuation ratios.

Common stock, preferred stock and share classes

Common stock is what people usually mean by “stock”. It has voting rights and the full upside, and it is last in line in a bankruptcy.

Preferred stock usually pays a fixed dividend and gets paid before common stock in a bankruptcy, but normally has no vote and limited upside. It behaves partly like a bond.

Share classes (Class A, Class B and so on) let a company give different voting power to different groups, often so the founders keep control. The economic claim on profits is usually similar, but the votes are not. The company’s annual report explains each class.

Where the risk comes from

Stocks are riskier than a savings account or a government bond because nothing is promised. A company’s profits can shrink, its industry can change, it can take on too much debt, or the whole market can fall at once.

A single company can go to zero. A broad basket of hundreds of companies has never gone to zero, though it has fallen by half or more and taken years to recover. That difference is the reason diversification comes up again and again in this course.

Owning vs trading

An owner buys shares because they expect the business to be worth more in five or ten years, and mostly ignores daily price moves. A trader buys shares because they expect the price to move over days or weeks, and cares a lot about those moves.

Both are buying the same thing, a share of a business. The difference is the time frame and the reason for the trade. Investing vs trading covers that choice in detail.

Try it

Pick a company whose products you use. Look up its ticker symbol and add it to the Watchlist. Then write down, in your own words, what it sells and how it makes money. Do that for five companies before you place a single trade.

Sources

• Investor.gov (SEC): Stocks
• FINRA: Stocks
• Investor.gov (SEC): Preferred stock