What is a Stock?
A stock (also called a share or equity) is a type of security that represents ownership in a company. When you purchase a stock, you become a partial owner, or shareholder, of that company. While this does not mean you manage the company on a daily basis, it does grant you several important rights as an owner.
These rights include receiving dividends when the company earns a profit, voting on key corporate decisions at shareholder meetings, and in some cases receiving shareholder benefits such as discounts on products and services. Understanding what stocks are is the foundation of all stock market investing.
Key Concepts of Stocks
Why Do Stocks Exist?
Companies need large amounts of capital to build new factories, develop products, and expand their businesses. When bank loans are not sufficient, companies issue stocks to raise funds from a wide range of investors. This is the fundamental purpose of stocks.
How Stock Prices Move
Stock prices are determined by supply and demand. Simply put, when more people want to buy a stock, the price goes up. When more people want to sell, the price goes down.
Key factors that influence stock prices include:
- Company performance: Increasing sales and profits tend to push stock prices higher
- Economic news: A strong economy generally supports higher stock prices
- Interest rate changes: Lower interest rates often make stock investing more attractive
- Global events: International developments can affect the entire market
How You Profit from Stocks
There are two primary ways to profit from stock investing:
- Capital gains: Buying a stock at a low price and selling it at a higher price
- Dividends: Regular distributions of company profits to shareholders
Key Points for Beginners
- Stocks are the most fundamental financial instrument for investing. Make sure you understand what they are before you start
- Stock investing involves risk. Prices can go up or down, so only invest money you can afford to lose
- Many services now allow you to buy fractional shares, meaning you can start investing with just a few dollars
- Opening a brokerage account is typically free. Start small and learn as you go
Summary
A stock is a security issued by a company to raise capital, and purchasing one makes you a partial owner of that company. Stock investing offers two main ways to profit: capital gains and dividends. Since stock prices fluctuate based on supply and demand, the most important mindset for beginners is to understand the risks and start small with money they can afford to invest.