What is a Stock? 🏢
When you buy a stock, what are you actually getting? Let's demystify this once and for all.
The Simple Answer
A stock is a tiny piece of ownership in a company.
When you buy one share of Apple, you literally own a small fraction of Apple Inc.—its buildings, products, cash, brand, everything.
The Pizza Parlor
Imagine your friend opens a pizza shop and needs $100,000 to get started. They divide ownership into 100,000 "shares" at $1 each.
If you buy 1,000 shares for $1,000, you own 1% of the pizza shop. When the shop makes money, you get 1% of the profits. If someone offers to buy the whole shop for $200,000, your 1% is now worth $2,000.
That's exactly how stocks work—just with bigger companies and more shares.
What Ownership Actually Means
When you own stock, you have:
1. A Claim on Profits
Companies can share profits with owners through dividends—cash payments sent to shareholders.
2. A Claim on Assets
If the company were sold or liquidated, shareholders get their portion (after debts are paid).
3. Voting Rights
Most stocks let you vote on major company decisions, like who sits on the board of directors.
4. Potential for Growth
If the company becomes more valuable, your shares become more valuable too.
How Many Shares Exist?
Apple has about 15 billion shares outstanding. If you own 100 shares, you own 0.0000007% of Apple. Tiny? Yes. But you still own a real piece of one of the world's most valuable companies.
Stock vs. The Company
Important distinction:
- The company runs the business, makes products, earns revenue
- The stock is just the ownership certificate that trades on exchanges
The stock price can move independently of the company's actual performance in the short term. But over the long term, stock prices follow company performance.
Key Takeaways
- A stock represents real ownership in a real company
- Shareholders have claims on profits and assets
- Stock prices ultimately reflect company value over time
Why Companies Issue Stock
Companies sell stock to raise money. Instead of borrowing (debt), they sell ownership (equity).
Example: A startup needs $10 million to grow. They can:
- Borrow $10M and pay it back with interest (debt)
- Sell 20% of the company for $10M (equity/stock)
Option 2 means no debt payments, but the founders now own less of their company.
The Two Ways Stocks Make You Money
1. Price Appreciation
You buy at $50, sell at $75 = $25 profit per share.
2. Dividends
The company pays you $2 per share per year just for owning it.
Total Return = Price Appreciation + Dividends
Some stocks focus on growth (price appreciation), others on income (dividends), and some offer both.
Common Misconceptions
- "Stock prices are random gambling" — No, they reflect real company value over time
- "I need to buy whole shares" — No, fractional shares let you buy any dollar amount
- "Owning stock is like owning a lottery ticket" — No, you own a piece of a real business
Next up: Why do stock prices move up and down? Let's explore supply and demand.