What Is a Stock?


Stocks, company shares, and equities are an essential part of many investors’ wealth-building strategy. But they can also be confusing. Understanding the difference between different types of stocks can help you make smarter investment choices and build a diversified portfolio.

What is a stock?

A stock is a fractional ownership of a company’s equity. It is distinct from a bond, which works as a loan, not an ownership stake. Companies issue stocks to raise money to fund projects or expand their operations. The type of stock you hold, common or preferred, determines the rights and benefits you receive as a shareholder.

The benefits of owning stock include the potential for long-term capital appreciation, voting rights, and dividends. These factors can add up to lucrative returns over the long term, especially if you have the patience to invest in a portfolio of multiple companies.

Choosing the right stocks for you is not as simple as picking out a few high-performing businesses that fit your investing objectives. It requires careful research into a company’s history, financial health, and potential for growth.

There are several ways to assess a company’s business model, including looking at its price-to-earnings ratio (P/E), net profit margin, and return on equity. Investors also need to consider the value of a company’s intangible assets, such as brand recognition and patents.

Shares of common stock typically grant shareholders the right to vote in shareholder meetings, while those holding preferred stock have a monetary and directive stake in the company. The preferred shareholders are entitled to dividend payments before common stockholders do, and they generally have priority in recouping their investment should the company go into bankruptcy.

Dividends are an important part of owning stock because they provide a source of passive income. They are paid out by the company in either cash or additional shares of stock. If a company is struggling, executives may decide to cut dividend payments, which can lower the value of shares and reduce profit.

The best way to get started with stocks is to open a brokerage account and begin researching individual companies. This process will require you to spend a lot of time studying a company’s historical information, current press coverage, and trends in their industry.

Once you have a handle on these factors, you can then start searching for a company that has a strong competitive advantage. These strengths are often based on the company’s defensible economic moat or intangible assets that offer a significant edge over competitors.

Another factor that can impact the price of a stock is supply and demand. A company’s ability to supply enough inventory to satisfy customer orders can make a huge difference in its share price.

The price of a stock can also change based on news surrounding the company, which can affect its overall market value. Fortunately, the Securities and Exchange Commission makes it easy for investors to find and analyze this information. In addition, many brokers offer stock index funds and exchange-traded funds (ETFs), which are pre-set “baskets” of a variety of stocks at a fixed price per share.