What a Stock Is

Why this matters

It's easy to think of a stock as a ticker symbol and a price that moves on a screen. Behind every share is a real business with customers, employees, costs, and profits. Understanding what you own is the foundation for everything in Parts 3 and 4, where you'll learn to judge those businesses.

A piece of a company

A stock, also called a share or equity, is a unit of ownership in a company. Owning a share gives you a claim on your proportional part of the company's assets and profits.¹ If a company has 1,000,000 shares and you own 1,000 of them, you own 0.1% of the business.

That ownership comes with some rights. The standard kind of share, common stock, usually lets you vote at shareholder meetings, for example on who sits on the company's board of directors.¹ What you don't get is a say in day-to-day decisions. Those are made by management, who answer to the board.

Two ways stocks can reward you

• The price can rise. If the business grows more valuable, or investors come to expect it will, the share price tends to rise, and you can sell for more than you paid. This is called capital appreciation.¹
• The company may pay dividends. A dividend is a payment to shareholders, usually from profits.¹ Many companies pay none and reinvest everything in the business instead. Dividends get their own lesson in this module: Dividends and Buybacks.

Together, the price change and any dividends make up a stock's total return, the same idea you met in Market Indexes: What "The Market" Means.

Maria buys 100 shares of STU Corp, a fictional company, at $40 each: $4,000 in total. Over the year, the company pays dividends of $1.00 per share, and the price rises to $43.

	Amount
Dividends received (100 × $1.00)	$100
Price gain (100 × $3), not yet sold	$300
Total return	$400, or 10% of $4,000

The same year could just as easily have gone the other way: no dividend increase, and a price drop to $35, for a loss. Stocks offer the potential for growth and income, not a promise of either.

If things go wrong

Shareholders are owners, and owners are paid last. If a company fails, the money that's left goes first to those it owes, such as lenders and bondholders. Shareholders get whatever remains, which is often nothing. That's a big part of why stocks are riskier than bonds, which Part 2 covers in What a Bond Is.

There's an important limit, though. When you buy a stock, the most you can lose is the amount you invested.² You aren't personally responsible for the company's debts. This protection is called limited liability.

Key takeaways

• A stock is a unit of ownership in a company, with a proportional claim on its assets and profits.
• Common stock usually comes with voting rights, but not a say in daily decisions.
• Stocks can reward you through price gains and dividends. Neither is guaranteed.
• Shareholders are paid last if a company fails, but can't lose more than they invested.

Check your understanding

A company goes bankrupt owing far more than it's worth. You own $2,000 of its stock. What's the most you can lose?

1. Your $2,000 plus a share of the company's debts.
2. Your $2,000.
3. Nothing, because shareholders are protected.

A company pays no dividend. Can its stock still reward shareholders?

1. No. Without dividends, shareholders get nothing until the company closes and sells its assets.
2. Only if another company buys it and pays shareholders for their shares.
3. Yes, if the share price rises, for example because the company reinvests profits and grows.

What's next

Why would a company sell pieces of itself at all? The next lesson, Why Companies Issue Stock, covers how companies raise money and what an IPO involves.