Course outline
Lesson 5 of 207 min read
Stocks: owning part of a company
A share of stock is a small slice of ownership in a company. You can profit if the company grows, and lose if it struggles.
What a share really is
A stock (also called a share or equity) is a small piece of ownership in a company. If a company is split into 1 billion shares and you own 10, you own a tiny fraction of everything it has and earns.
Companies sell shares to raise money to grow. After that, shares are bought and sold between investors on a stock exchange, and the price moves with supply and demand.
How stock investors make money
- Price growth. If the company becomes more valuable, its share price tends to rise. If you sell for more than you paid, the profit is a capital gain.
- Dividends. Some companies pay part of their profits to shareholders, often every quarter. Many growing companies pay none and reinvest instead.
In the short run, prices react to news, interest rates and investor mood, so they can swing a lot. Over long periods, prices have tended to follow company earnings.
The risk of owning just one
Any single company can stumble. Products flop, competitors win, and some companies go bankrupt, making their shares worth nothing. Famous names aren't immune.
Key takeaways
- A share is part-ownership of a real business.
- Stock returns come from price growth and, sometimes, dividends.
- Any single company can fail, so owning just one is risky.
Key terms
- Capital gain
- The profit when you sell an investment for more than you paid. It's taxable in regular accounts once you sell.
- Dividend
- A share of a company's profits paid to its shareholders, often every quarter. Not all companies pay them.
- Stock
- A share of ownership in a company. Also called a share or equity.
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