What you own when you buy a stock
When you buy a stock, you own a small piece of a real company. If a company has issued one million shares and you buy 100 of them, you own one ten-thousandth of that company. That ownership stake is called equity. You are not lending money to the company — you are becoming a part-owner.
The company does not have to pay you back. Instead, you make money two ways: if the company becomes more valuable over time (so your share is worth more when you sell it), or if the company pays dividends — cash distributions sent to shareholders from company profits. Not all companies pay dividends. Many growing companies reinvest all profits back into the business instead.
You buy and sell stocks through a brokerage — a financial company that holds your account and executes trades. You cannot walk into a company's office and buy shares directly. You need a brokerage account first, which takes about 10 minutes to open online.
Key Takeaways
- Buying a stock means you own a percentage of a company, not a loan you will be repaid.
- Stock prices move based on what other buyers and sellers think the company is worth right now, not on any official valuation.
- You make money when the stock price rises and you sell, or when the company pays dividends to shareholders.
- You lose money if the stock price falls below what you paid, and you can lose your entire investment if the company fails.
- You buy and sell through a brokerage account, and the trade settles (money and shares exchange hands) within two business days.
How stock prices are set and change
Stock prices are set by supply and demand — the same force that sets the price of anything else. At any moment, there is a price at which buyers want to buy and a price at which sellers want to sell. When those prices meet, a trade happens. If more people want to buy than sell, the price goes up. If more people want to sell than buy, the price goes down.
No central authority decides what a stock is "worth." The price is straightforward whatever the last buyer and seller agreed on. This means the price can change many times per second during trading hours (9:30 a.m. to 4 p.m. Eastern time on weekdays when the market is open). After hours, prices can still move, but the volume of trades is much lower.
Prices move because new information arrives — earnings reports, news about the industry, changes in the economy, or shifts in what investors think about the company's future. A stock might jump 10 percent in one day because the company announced better-than-expected profits, or it might fall 10 percent because a competitor released a new product.
The difference between stock price and company value
A stock's price and the company's actual value are not the same thing. The price is what the market is willing to pay right now. The company's value depends on its assets, profits, growth rate, and the risks it faces — things that do not change as fast as the stock price does.
This gap is why stocks can feel volatile. A company's fundamentals might not change much in a week, but the stock price can swing 20 percent because investor sentiment shifted. Some investors believe the price will eventually match the true value; others trade based on short-term price movements regardless of value.
This is also why two people can look at the same stock and disagree completely on whether to buy it. One person might think the company is undervalued at the current price. Another might think it is overvalued. The market price reflects the balance of all those opinions at that moment.
How you make and lose money on stocks
You make money on a stock in two ways. First, capital gains: you buy at one price and sell at a higher price, pocketing the difference. If you buy 10 shares at $50 each and sell them at $60 each, you have a $100 gain (before any fees or taxes). Second, dividends: some companies send cash to shareholders, usually quarterly. If you own the stock on the dividend date, you receive your share of the payout.
You lose money if the stock price falls below what you paid. If you bought 10 shares at $50 and the price drops to $40, you have an unrealized loss of $100 — it is only real if you sell. You can also lose money if you sell before a dividend payment date and miss the payout, or if the company cuts its dividend.
The worst-case scenario is that the company goes bankrupt. When that happens, shareholders are last in line to recover anything. Creditors and bondholders get paid first. Often, shareholders get nothing. This is why stock ownership carries real risk — you can lose your entire investment.
How trades actually happen
When you place an order to buy or sell a stock through your brokerage, you are joining a queue of other buyers and sellers. Your order goes to an exchange — a marketplace where stocks are traded. The major exchanges in the United States are the New York Stock Exchange (NYSE) and the NASDAQ. Your brokerage connects you to these exchanges.
Most orders today are market orders — you say "sell 10 shares of Apple" and the brokerage sells them at whatever the current price is, usually within seconds. The alternative is a limit order — you say "sell 10 shares of Apple only if the price is at least $150" and the order waits until that price is available or expires if it never is.
Once a trade is executed, it takes two business days to settle — for the money to leave your account and the shares to arrive (or vice versa). During those two days, you own the shares even though the cash has not left your account yet. This delay is a technical requirement of the financial system, not something your brokerage controls.
Why stock prices matter to the broader economy
Stock prices affect more than just investors. When stock prices rise, people who own stocks feel wealthier and tend to spend more money, which helps the economy. When prices fall sharply, people cut spending, which can slow economic growth. This is why stock market crashes are treated as serious events by policymakers.
Companies also use stock prices as a signal. If a company's stock price is high, it is cheaper for that company to raise money by issuing new shares (selling more ownership). If the price is low, the company might borrow money instead. Stock price also affects how much a company can pay its employees in stock options, and whether other companies want to buy it.
Common mistakes when starting with stocks
New investors often buy based on a hot tip or recent price movement, without understanding what the company does or whether the price makes sense. A stock that jumped 50 percent last month might fall 50 percent this month. Past performance does not predict future results.
Another mistake is checking the price too often. If you own a stock for 20 years, the daily price swings are noise. But if you check every day, you feel pressure to react to every move. Most financial advisors recommend deciding on a strategy (how long you will hold, how much you will invest, how much risk you can tolerate) before you buy, then checking less frequently.
A third mistake is putting all your money into one or two stocks. If that company has problems, your entire investment suffers. Spreading money across many stocks — or using funds that hold many stocks for you — reduces this risk.
Frequently Asked Questions
Do I have to own a stock forever?
No. You can sell a stock anytime the market is open. You can hold for one day or 50 years. The only limit is that if you sell within 30 days of buying, you trigger a "wash sale" rule that affects how you report losses on your taxes — but you can still sell whenever you want.
What happens if a company splits its stock?
A stock split means the company divides each share into multiple shares. If you own 100 shares and there is a 2-for-1 split, you now own 200 shares, each worth half as much. Your total value stays the same. This is usually done to make the stock price lower and more accessible to small investors.
Can a stock price go to zero?
Yes. If a company goes bankrupt or is delisted from the exchange, the stock price can fall to zero. Your shares become worthless. This is rare for large, established companies, but it happens to smaller or struggling companies. This is why diversification matters.
Do I need a lot of money to start buying stocks?
No. Most brokerages let you buy fractional shares, meaning you can invest $10 or $100 and own a piece of an expensive stock. Some brokerages have no minimum account balance. You can start with whatever amount you can afford to risk.
What is the difference between stocks and bonds?
A stock is ownership in a company. A bond is a loan you make to a company or government. With a bond, you get paid interest and your money back on a set date. With a stock, you own a piece of the company's future profits but have no may provide return. Bonds are generally less risky but offer lower potential returns.