What Is a Stock?
A stock (also known as a share or equity) is a unit of ownership in a company. When you buy a stock, you become a shareholder and own a portion of the company. As a shareholder, you may be entitled to a portion of the company’s profits (known as dividends) and you may have the right to vote on certain company decisions.
How Do Stocks Work?
Stocks work by providing investors with an opportunity to purchase ownership in a company in exchange for a share of its profits and the potential for future capital gains. When a company wants to raise capital, it can issue stocks by selling ownership stakes to investors. These stocks are traded on stock exchanges or over-the-counter markets, where buyers and sellers can exchange ownership in the company.
The price of a stock is determined by supply and demand. If more people want to buy a stock than sell it, the price will typically increase. Conversely, if more people want to sell a stock than buy it, the price will typically decrease.
When you buy a stock, you become a shareholder in the company and own a portion of its assets and earnings. As a shareholder, you may receive dividends (a portion of the company’s profits) if the company decides to pay them out. Additionally, if the company performs well and its stock price increases, you may be able to sell your shares for a profit.
Types of Stocks
There are two main types of stocks: common stock and preferred stock. Here’s a brief explanation of each:
- Common stock: Common stock represents ownership in a company and entitles the shareholder to vote on certain company decisions, such as the election of board members and approval of major company initiatives. Common stockholders may also receive dividends, although these are not guaranteed and are typically paid out after preferred stockholders are paid. If a company goes bankrupt or liquidates, common stockholders are last in line to receive any remaining assets after creditors and preferred stockholders are paid.
- Preferred stock: Preferred stock is a type of stock that typically pays a fixed dividend and has priority over common stock in the event of a company’s bankruptcy or liquidation. Preferred stockholders generally do not have voting rights, but they have a higher claim on the company’s assets and earnings than common stockholders. Some preferred stock can be “convertible,” which means it can be converted to common stock at a predetermined price.
In addition to these two main types of stocks, there are other types of securities that are similar to stocks, including convertible bonds, exchange-traded funds (ETFs), and American Depositary Receipts (ADRs). These securities may have stock-like characteristics, such as the potential for capital gains and the ability to be traded on stock exchanges, but they have different structures and features than common or preferred stock.
Examples of Stocks
The Bottom Line
Stocks are not guaranteed to provide a return on investment and are subject to market risks. Factors that can impact a stock’s price include the company’s financial performance, industry trends, and macroeconomic factors such as interest rates and political events. It’s important to research a company’s financial health and consider your own risk tolerance before investing in its stock.