What a stock actually is

When you buy a stock, you own a small piece of a real company. If a company needs money to grow, it can split itself into thousands or millions of equal pieces called shares. You buy one or more of those pieces. That piece is your stock.

The company keeps running its business — making products, hiring people, earning revenue. As the company does better or worse, the value of your piece goes up or down. You can sell your piece to someone else at any time during market hours, and the price you get depends on what other people think that piece is worth right now.

This is different from lending money to a company (a bond) or putting money in a savings account (where the bank pays you interest). With a stock, you own something. You are betting that the company will become more valuable over time.

Key Takeaways

  • A stock is a share of ownership in a company, and its price changes based on what investors think the company is worth.
  • You make money on stocks in two ways: the price goes up and you sell it for more than you paid, or the company pays you a dividend from its profits.
  • Stock prices move during market hours (9:30 a.m. to 4 p.m. Eastern time on weekdays when the market is open), and you can only buy or sell during those times.
  • The stock market is a real marketplace where millions of people and institutions buy and sell shares every day, and the price is set by supply and demand.
  • You need a brokerage account to buy stocks, and the broker holds your shares and handles the transaction.

How stock prices move

Stock prices are set by supply and demand, just like the price of anything else. If many people want to buy a stock and few people want to sell it, the price goes up. If many people want to sell and few want to buy, the price goes down.

What makes people want to buy or sell? News about the company — earnings reports, new products, lawsuits, leadership changes, or changes in the industry. News about the economy — interest rates, inflation, recessions. And sometimes just the mood of the market that day. A stock can go up or down 5 percent or more in a single day based on a single news story.

You do not have to do anything to own the stock while you hold it. You do not have to check on it every day. But if you want to sell it, you have to sell during market hours, and the price you get is whatever the market price is at that moment — not the price you paid, and not the price you hope to get.

The two ways to make money from stocks

The first way is capital gain. You buy a stock at one price and sell it at a higher price. The difference is your profit. If you buy at $50 and sell at $60, you made $10 per share. If you own 100 shares, that is $1,000 profit. You pay taxes on that profit in the year you sell.

The second way is dividends. Some companies, especially large established ones, share part of their profits with shareholders. The company announces a dividend per share — say, $2 per share per year. If you own 100 shares, you receive $200 that year, usually in quarterly payments. You pay taxes on dividends in the year you receive them, whether you sell the stock or not.

Many stocks pay no dividend at all. The company keeps all its profits to reinvest in the business. You make money only if the stock price goes up and you sell. Other stocks pay a small dividend and also go up in price over time. There is no rule about which is better — it depends on the company and what stage it is in.

How you actually buy and sell stocks

You cannot walk into a store and buy a stock. You need a brokerage account with a company that is licensed to buy and sell stocks on your behalf. The broker connects you to the stock market, executes your trades, and holds your shares in your account.

You open an account online with a broker (examples include Fidelity, Charles Schwab, E-Trade, or Robinhood). You link a bank account and transfer money in. Then you search for the stock you want — usually by the company name or its ticker symbol, a short code like AAPL for Apple or MSFT for Microsoft. You enter how many shares you want to buy and at what price, and the broker sends your order to the market.

If you are buying during market hours and you accept the current market price, your order usually fills in seconds. If you set a specific price you are willing to pay (called a limit order), the broker waits until the stock hits that price, which might take days or might never happen. When you want to sell, you do the same thing in reverse — enter how many shares and at what price, and the broker sells them.

The broker charges you a commission for each trade. Many brokers now charge zero commission for stock trades, but some still charge a small fee. Some brokers also charge monthly account fees if your balance is below a certain amount, or fees for certain services. Read the fee schedule before you open an account.

What moves the stock market as a whole

Individual stocks move based on company news, but the entire stock market — measured by indexes like the S&P 500 or the Dow Jones Industrial Average — moves based on the health of the economy. When the economy is growing, unemployment is low, and people are spending money, stocks tend to go up. When the economy is shrinking, unemployment is rising, and people are cutting spending, stocks tend to go down.

Interest rates set by the Federal Reserve also matter. When interest rates are low, borrowing money is cheap, companies can expand more easily, and stocks look attractive compared to bonds or savings accounts. When interest rates are high, borrowing is expensive, company profits shrink, and people move money into bonds or savings accounts instead.

Inflation — the rising cost of goods and services — also affects stocks. Moderate inflation is normal, but high inflation erodes company profits and makes people nervous about the future, so stocks fall. The stock market is always trying to predict what the economy will do next, so stocks can move based on expectations about future inflation or interest rates, not just what is happening right now.

The difference between stock market and individual stocks

The stock market is the system and the place where stocks are bought and sold. It includes the exchanges (like the New York Stock Exchange and the NASDAQ), the brokers, the regulators, and all the rules. When people say "the market is up" or "the market is down," they usually mean one of the major indexes — a basket of stocks that represents the overall health of the market.

An individual stock is one company's shares. Apple stock can be up while the overall market is down, or vice versa. A company can have great news but the market can be in a bad mood that day, so the stock still falls. Or a company can have bad news but the market can be rallying, so the stock still rises. Individual stocks are noisier and move more than the market as a whole.

Risk and volatility

Stocks are more volatile than bonds or savings accounts. A stock can lose 20 percent of its value in a month. A company can go bankrupt and your shares become worthless. This is the trade-off: stocks have higher potential returns, but also higher risk.

Different stocks have different levels of risk. A large, established company like Coca-Cola is less volatile than a small startup. A company in a stable industry like utilities is less volatile than a company in a fast-changing industry like technology. You can reduce your risk by owning many different stocks instead of just one or two — this is called diversification. Many people use mutual funds or exchange-traded funds (ETFs) to own dozens or hundreds of stocks at once with a single purchase.

How much risk you should take depends on how long you plan to hold the stocks and how much you can afford to lose. If you need the money in two years, stocks are probably too risky. If you do not need the money for 20 years, you can ride out the ups and downs and likely come out ahead.

Frequently Asked Questions

Can I lose more money than I invested in a stock?

No. The worst that can happen is the stock goes to zero and you lose your entire investment. You cannot owe money to the broker or the company. The only exception is if you borrow money from your broker to buy stocks (called margin), in which case you could owe more than your investment if the stocks fall sharply.

Do I have to own a stock forever?

No. You can sell anytime the market is open. You can hold for one day or 30 years. There is no minimum holding period. However, if you sell within one year of buying, any profit is taxed as short-term capital gain, which is taxed at your regular income tax rate. If you hold for more than one year, profit is taxed as long-term capital gain, which usually has a lower tax rate.

What happens if the company I own stock in gets bought by another company?

Usually, the acquiring company offers to buy your shares at a set price per share. You can accept the offer and get paid, or in rare cases you can refuse. Either way, you stop owning the original company's stock. The acquiring company may or may not offer its own stock in exchange.

How do I know what price to pay for a stock?

There is no single "right" price. The market price is what it is at any moment. Many investors use financial analysis — looking at the company's earnings, growth rate, and industry — to decide if a stock is underpriced or overpriced. Others use simpler strategies like buying a broad index fund and holding it for decades. There is no may provide way to pick winners.

Can I buy partial shares?

Yes. Many brokers now allow you to buy fractional shares, so you can invest $100 in a stock that costs $150 per share. You would own 0.67 shares. This makes it easier to diversify with a small amount of money.