A stock is a share of ownership in a company

When you buy a stock, you own a small piece of that company. If a company has issued one million shares and you own 100 of them, you own one ten-thousandth of the business. The company divides itself into these equal pieces and sells them to raise money. You become a shareholder — someone who holds shares and therefore owns part of the company.

Companies issue stocks because they need cash to start operations, expand, build factories, hire people, or develop new products. Instead of borrowing money from a bank and paying interest, they can sell ownership stakes to investors. You get a piece of the company; the company gets the money it needs.

Stock ownership does not mean you get to make decisions about how the company runs day-to-day. That is what the board of directors and management do. What you own is a claim on the company's future earnings and assets. If the company becomes more valuable, your share becomes more valuable. If the company loses money, your share loses value.

Key Takeaways

  • A stock represents fractional ownership in a company, and you own whatever percentage of shares you hold relative to all shares outstanding.
  • Stock prices change based on what buyers and sellers think the company is worth right now, not on the company's accounting value alone.
  • You make money from stocks in two ways: the price goes up and you sell for more than you paid, or the company pays dividends to shareholders.
  • Stocks are riskier than bonds or savings accounts because company value can drop sharply, and you could lose your entire investment.
  • You buy and sell stocks through a brokerage account, which is a service that connects you to stock exchanges where trades happen.

How stock prices are set and what moves them

Stock prices are not set by the company. They are set by the market — by what buyers are willing to pay and what sellers are willing to accept at any given moment. 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? Expectations about the company's future. If a company announces strong earnings, a new product, or a new contract, investors expect the company to be worth more, so they buy and the price rises. If the company announces layoffs, a failed product, or a lawsuit, investors expect it to be worth less, so they sell and the price falls. News, rumors, economic conditions, and investor mood all affect what people think a company is worth.

This is why stock prices move constantly during trading hours. The market is always repricing based on new information and changing expectations. A stock you bought for $50 might be worth $55 tomorrow or $45 tomorrow. That change does not mean the company changed overnight — it means what investors think about the company changed.

Two ways to make money from stocks

Capital gains happen when you sell a stock for more than you paid for it. If you buy a stock at $40 and sell it at $60, you have a $20 gain per share. If you buy at $40 and sell at $30, you have a $10 loss per share. You only realize the gain or loss when you actually sell — until then, it is just a change in what your shares are worth on paper.

Dividends are payments some companies make to shareholders from their profits. Not all companies pay dividends. Those that do typically pay them quarterly (four times a year). A company might pay $0.50 per share each quarter, so if you own 100 shares, you receive $50 that quarter. Dividends are separate from stock price changes — you can own a stock that pays dividends and also see the price go up or down.

Some investors focus on capital gains by buying stocks they think will rise in price. Others focus on dividends by buying stocks that pay regular payments. Many investors want both — a stock that pays dividends and also grows in price over time.

Why stocks are riskier than other investments

Stock prices can fall sharply and stay down for a long time. A company can lose customers, face competition, make bad decisions, or encounter problems in the economy. When that happens, the stock price can drop 20%, 50%, or even more. If you need the money soon and the stock is down, you have to sell at a loss or wait and hope it recovers.

In the worst case, a company can go bankrupt. When that happens, shareholders are last in line to get paid. Creditors, bondholders, and employees get paid first from whatever assets remain. Shareholders often get nothing. You can lose your entire investment.

Bonds and savings accounts are safer because they promise you a fixed payment. A bond issuer promises to pay you back with interest. A bank promises to return your deposit. A stock issuer promises nothing — you own a piece of the company, and the company's value can go anywhere. This is why stocks are considered higher-risk investments and are usually recommended only for money you will not need for several years.

How you buy and sell stocks

You cannot walk into a company and buy stock directly. You buy through a brokerage — a financial firm licensed to buy and sell stocks on your behalf. You open an account with a brokerage (online brokerages like Fidelity, Charles Schwab, and E-Trade are common), deposit money, and then place orders to buy or sell stocks.

When you place a buy order, the brokerage sends it to a stock exchange — a marketplace where stocks are bought and sold. The major U.S. exchanges are the New York Stock Exchange (NYSE) and the NASDAQ. The exchange matches your order with a seller's order at an agreed price, and the trade happens in seconds. The stock then appears in your brokerage account, and you own it.

When you want to sell, you place a sell order through the same brokerage. It goes to the exchange, gets matched with a buyer, and the cash lands in your account. You can then withdraw the cash or use it to buy other stocks. Brokerage accounts are typically free to open, though some brokerages charge commissions per trade (though many have eliminated these fees in recent years).

Common types of stocks and how they differ

Common stock is what most investors buy. You own a piece of the company and have the right to vote on major decisions at shareholder meetings (though most individual shareholders do not attend). Common stockholders are last in line if the company goes bankrupt.

Preferred stock is less common. Preferred shareholders get paid dividends before common shareholders do, and they are higher in line if the company goes bankrupt. In exchange, preferred shareholders usually cannot vote and the stock price does not typically grow as much. Preferred stock behaves more like a bond than common stock.

Stocks are also grouped by company size. Large-cap stocks are companies worth tens of billions of dollars (like Apple or Microsoft). Mid-cap stocks are companies worth a few billion dollars. Small-cap stocks are companies worth less than a few billion. Larger companies tend to be more stable; smaller companies tend to be riskier but can grow faster.

Stocks versus bonds and other investments

A bond is a loan you make to a company or government. You lend money, they promise to pay you back with interest on a set schedule. Bonds are less risky than stocks because the payment is promised and fixed. But bonds also offer lower returns — you know exactly what you will make. Stocks offer higher potential returns but with much higher risk.

A mutual fund or exchange-traded fund (ETF) is a basket of many stocks (or bonds, or both) bundled together. Instead of buying individual stocks, you buy one fund that owns pieces of dozens or hundreds of companies. This spreads your risk — if one company does poorly, it is a small part of your fund. Mutual funds and ETFs are popular for people who do not want to pick individual stocks themselves.

A savings account or certificate of deposit (CD) is the safest option. Your money is insured by the government (up to $250,000 per account at FDIC-insured banks), and you earn a small, may provide interest rate. You will not lose money, but you will not grow it much either. These are best for money you need soon or cannot afford to lose.

Frequently Asked Questions

Do I have to own a whole share of stock, or can I buy a fraction?

Most brokerages now allow fractional shares, meaning you can buy $50 worth of a stock that costs $200 per share. You would own one-quarter of a share. This makes stocks more accessible if you do not have much money to start with. Check your brokerage to see if they offer fractional shares.

What happens to my stock if the company gets bought by another company?

When one company buys another, the acquiring company usually offers to buy all the shares of the target company at a set price per share. You can accept the offer and sell your shares at that price, or in rare cases reject it. The acquiring company then owns the target company and your shares are converted or retired.

Can a stock price go to zero?

Yes. If a company goes bankrupt and has no assets left to distribute to shareholders, the stock becomes worthless. This is rare for large, established companies but more common for small or struggling companies. This is why diversification — owning many stocks instead of just one — is important.

How do I know which stocks to buy?

This guide explains what stocks are and how they work, but choosing which stocks to buy is a separate decision that depends on your goals, risk tolerance, and time horizon. Many people read company financial reports, follow business news, or use stock research tools. Others buy index funds or ETFs that own many stocks instead of picking individual ones.

Do I pay taxes on stocks I own but have not sold yet?

No. You only pay taxes when you sell a stock and realize a gain. If you own a stock that goes up in value but you do not sell, there is no tax owed yet. Once you sell, you owe capital gains tax on the profit. Dividends are also taxable in the year you receive them, even if you do not sell the stock.