What Is a Stock?
Have you ever had a large company corner you in a dark alley and shout at you, “Do you want a piece of me?” Probably not, but when a company puts shares of itself for sale, that’s what it’s doing. Minus the dark alley and the shouting, we hope.
Quick take: A share of stock represents ownership of a company.
- The more of a company’s shares you own, the more of the company you own.
- Common shares (usually) allow you to vote on company matters and entitle you to distributions of profits or proceeds from the sale of the company.
- Preferred stock entitles you to a dividend that’s usually fixed.
- Each share of a specific company is identical (like, say, dollar bills), which makes them easy to buy and sell, unlike buying a used car or piece of art.
Tell me more! Companies sell shares to raise money to expand, pay down debt, or realize profit (as in, a founder wants to buy a yacht). The first time shares are offered for sale is called the initial public offering (IPO).
- How can you make money from buying stocks? The four ways you can earn money from a stock are: 1) selling the shares at a higher price than what you paid for them; 2) receiving a dividend; 3) receiving proceeds from a buyout; and 4) loaning the shares to other investors who want to sell them short.
- How much is [random stock] worth? A stock’s price is the market’s best estimate of how much cash the stock will generate over time, minus discounts for time and the risks of being wrong. Whenever some shnook says a stock is “too high” or “too low,” they are stating a forecast, not a fact. No one can foretell the future.
One more thing: Diversification is important. Spreading your ducats among different stocks is a mighty smart thing to do. When you buy stocks of different companies, you’re reducing the risk of one company underperforming. If you buy stocks in different industries, you’ll reduce even more risk because stocks in the same industry tend to move together. That’s why index funds are so popular.
Did you know
The New York Stock Exchange’s roots go back to May 17, 1792, when 24 brokers signed the Buttonwood Agreement outside 68 Wall Street. The brokers agreed to only trade between themselves and set a minimum commission. The Dutch East India Company, formed in 1602, is believed to be the first publicly traded company.
More on stock market basics
What Is a Bond?