What is stock?

Definition

When you own a stock, you hold a piece of ownership in a company, which makes you a shareholder. As a shareholder, you may have the opportunity to earn dividends if the company performs well, and you may also have a say in certain decisions made by the company.

Understanding a stock

Stocks play a significant role in the global economy by enabling companies to generate funds for their business operations by selling shares of ownership to the public. These shares can be purchased or sold on exchanges like the New York Stock Exchange (NYSE) or Nasdaq, and occasionally through private sales. The Securities Exchange Commission (SEC) regulates how companies can manage or distribute their stocks. Stocks come in two main types: common stock, which gives shareholders the right to vote on specific company decisions, and preferred stock, which doesn't offer voting rights but usually ensures fixed dividend payments indefinitely.

Example

If a company has a total of 100 shares of its stock available in the market, and you own only 1 share, then you own 1% of the company. Therefore, the value of your shares would represent approximately 1% of the company's market capitalization, which is the total value of all outstanding shares.

Gist

Let's say you have a dream of owning a cupcake shop, but you only have a limited budget of $1,000. To purchase the necessary supplies like flour, icing, and cupcake tins, you may ask for financial assistance from your friends and family. For instance, four of your friends contribute $1,000 each, allowing you to accumulate a total of $5,000 and successfully start the business. As a return on their investment, you may agree to give each of them 20% ownership of the business and a share of its profits. This is similar to how stocks function, although on a much grander scale.