Stock

What Is a Stock?

A stock, also called a share or equity, is a unit of ownership in a corporation. Owning even one share makes you a part owner of the company, with a claim on a proportion of its assets and profits. Companies issue stock to raise money for operations, expansion, or paying down debt. In exchange for that capital, they give investors a stake in the business and, usually, a say in certain major decisions.

How Stock Ownership Works

Most publicly traded companies issue common stock, which generally carries voting rights on matters such as electing the board of directors. Some companies also issue preferred stock, which typically pays a fixed dividend and has priority over common shareholders if the company is liquidated, though it often comes with limited voting power.

Stockholders can earn money in two main ways:

• Price appreciation, which is a capital gain realized when shares are sold for more than they cost.
• Dividends, which are cash or share payments a company distributes from its profits. Not all companies pay dividends.

Shares are bought and sold on stock exchanges or through other trading venues. A stock's price is set by supply and demand, so it can move up or down throughout the trading day.

Risks and Measures

Stock prices can fall, sometimes sharply, and a company that performs poorly or goes bankrupt may leave shareholders with little or nothing. Shareholders are paid only after creditors, so the full amount invested can be lost. Because of this, investors often look at measures such as market capitalization and the price-to-earnings ratio to understand a company's size and how its price compares with its earnings. Spreading money across many companies, known as diversification, is a common way to reduce the impact of any single company's trouble.