What is a Stock? Understanding Your Piece of a Company
A fundamental guide to what it means to own a stock and how it works.
What is a Stock?
A stock, also known as equity, represents a share of ownership in a public company. When you buy a stock, you're buying a small piece of that company. As an owner, you have a claim on the company's assets and earnings.
Why Do Companies Issue Stock?
Companies sell stocks to raise money (capital) to fund their operations, expand their business, develop new products, or pay off debt. This process is called going public through an Initial Public Offering (IPO).
How Do You Make Money from Stocks?
There are two primary ways: 1) Capital Gains: If the company does well, the value of its stock may increase. You can then sell your stock for a higher price than you paid for it. 2) Dividends: Some companies distribute a portion of their profits to shareholders in the form of regular payments called dividends.
What Determines a Stock's Price?
A stock's price is determined by supply and demand in the market. It's influenced by many factors, including the company's financial performance (earnings, revenue), its future growth potential, industry trends, economic conditions, and overall market sentiment.
Understanding Risk
The value of a stock can go down as well as up. If a company performs poorly or falls out of favor with investors, the stock price can fall, and you could lose money. This is why diversification—not putting all your money into one stock—is a crucial principle of investing.