What Is a Stock?
Written by Sam Levine, CFA, CMT
Fact-checked by Andrea Coombes
Edited by Carolyn Kimball
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.
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About the Editorial Team
Sam Levine is a writer, investor and educator with nearly three decades of experience in the investing industry. His specialty is making even the most complicated investing concepts easy to understand for beginning and intermediate investors. He holds two of the most widely recognized certifications in the investment management industry, the Chartered Financial Analyst and the Chartered Market Technician designations. Previously, he was a contributing editor at BetterInvesting Magazine and a contributor to The Penny Hoarder and other media outlets.
Andrea Coombes has 20+ years of experience helping people reach their financial goals. Her personal finance articles have appeared in the Wall Street Journal, USA Today, MarketWatch, Forbes, and other publications, and she's shared her expertise on CBS, NPR, "Marketplace," and more. She's been a financial coach and certified consumer credit counselor, and is working on becoming a Certified Financial Planner. She knows that owning pets isn't necessarily the best financial decision; her dog and two cats would argue this point.
Carolyn Kimball is Managing Editor for Reink Media Group and the lead editor for content on investor.com. Carolyn has more than 20 years of writing and editing experience at major media outlets including NerdWallet, the Los Angeles Times and the San Jose Mercury News. She specializes in coverage of personal financial products and services, wielding her editing skills to clarify complex (some might say befuddling) topics to help consumers make informed decisions about their money.
