What Is a Stock?

A stock, also called a share or equity, represents an ownership interest in a company. When a person owns stock, they may participate in the financial results of that company depending on the type of shares and the company's performance.

What Does Owning a Stock Mean?

Companies may divide ownership into units called shares. When an investor buys a share, the investor becomes a shareholder and owns a small interest in that company.

The rights attached to a share can depend on the company's structure, the class of shares and the laws or regulations that apply in the relevant market.

Why Do Companies Issue Stock?

Companies may issue shares to raise capital. The money raised may be used for purposes such as business expansion, product development, debt reduction, acquisitions or other corporate activities.

Publicly traded companies can have their shares bought and sold by investors through securities markets, subject to the rules and systems of the relevant exchange.

How Does a Stock Market Work?

A stock market provides a system through which buyers and sellers can trade eligible securities. Prices can change throughout the trading day based on supply and demand.

Many factors can influence stock prices, including company results, economic conditions, interest rates, investor expectations, industry developments and broader market sentiment.

How Can Investors Potentially Earn From Stocks?

1. Changes in Share Price

If an investor sells shares for more than the purchase price, the difference may result in a capital gain before considering taxes, fees and other costs.

If the shares are sold for less than the purchase price, the investor may experience a capital loss.

2. Dividends

Some companies may distribute part of their profits or other available funds to eligible shareholders as dividends. Dividend payments are not guaranteed and can be reduced, suspended or changed.

Common Types of Stock

The exact characteristics of shares can vary between companies and markets.

What Makes Stock Prices Change?

• Company earnings and financial performance.
• Business growth expectations.
• Economic conditions.
• Interest rate changes.
• Industry developments.
• Investor demand and supply.
• Global events and market sentiment.

Stock prices can be volatile, especially over shorter periods. A company's share price does not always move in a straight line, even when the underlying business is growing.

Stocks and Investing Risk

Stocks involve risk. A company can face competition, declining demand, management problems, financial difficulties or changing economic conditions.

In severe situations, shareholders may lose a significant portion or all of their investment.

Stocks vs Bonds

Should Everyone Invest in Individual Stocks?

Individual stocks may not be suitable for every investor. The appropriate approach can depend on financial goals, investment knowledge, time horizon, risk tolerance and the ability to handle losses.

Some investors prefer diversified approaches, such as funds or exchange-traded funds, rather than relying on the performance of a single company.

Key Takeaways

• A stock generally represents an ownership interest in a company.
• Companies may issue shares to raise capital.
• Stock prices can change based on many factors.
• Investors may experience gains, losses or dividends depending on circumstances.
• Dividends and profits are not guaranteed.
• Stocks involve investment risk and can lose value.
• Diversification may help manage certain risks but does not guarantee profits or prevent losses.