Disclaimer: This post contains references to products from one or more of our advertisers. We may receive compensation (at no cost to you) when you click on links to those products. Read our Disclaimer Policy for more information.
Much has been made of the stock market in recent years. There has been a worldwide renewed interest in stocks and investing as a whole during the coronavirus pandemic.
However, plenty of people are uncertain as to what exactly stocks are. If you have questions about stocks, you are not alone. We are here to help.
The stock market is complex, dynamic, and ever changing. Each day poses a new challenge and opportunity for investors.
Our stock definition is exactly what investors need to better understand this asset class, how they work, and more. Let’s dive in.
What is a Stock?
Stocks, also referred to as equities, are securities that represent an investor’s ownership in a publicly traded company.
Each retail investor (meaning everyday people) owns a fraction of the corporation.
The owner of the shares of stock holds a proportion of the overarching corporation’s total assets and profits that equate to their ownership of stock.
>> More: How to Start Investing
What Is an Example of a Stock?
There are nearly thousands of examples we could use; however, we will stick to stocks most people know. Here are a few examples of stocks:
Again, these are just a handful of stocks available to investors.
Corporations issue stocks to raise capital for business operations and to fuel ongoing growth.
The stock owner, known as the shareholder, owns a piece of the corporation. The type of shares held determines if the shareholder has a claim to part of the assets/earnings.
This means the shareholder is an official owner of the issuing business. The specific percentage of ownership is calculated based on the number of shares an individual owns in relation to outstanding shares.
It is important to note that shareholders do not actually own corporations. Rather, these individuals own shares publicly traded corporation’s issue. Here is where it gets a bit tricky and confusing.
The public corporations own property, borrow money, have legal liability, etc. In other words, shareholders who own stock do not own the tangible equipment within the company’s corporate office.
The corporation owns those items, not the shareholders. This distinction is important as it separates risk and liability between corporations and investors.
Stockholders and Equity
The shares issued through the corporation are owned by shareholders. The corporation owns the tangible assets (think company property).
So, investors never “actually” own a percentage of the company. Instead, investors own a percentage of the company’s shares. which comes with unique benefits, privileges, and responsibilities.
Owning stock gives investors the right to vote, sell your shares at anytime, and receive dividends depending on the company.
Different Types of Stocks
For investors, there are two types of stocks public corporations can issue: preferred and common stock.
Each shareholder has proportionate ownership. The corporation sells the shares of stock to raise money for business operations and scaling endeavors. Preferred and common stock are issued.
Investors who own common stock are able to vote in shareholder meetings and receive dividends. In contrast, investors who own preferred stock are not able to vote. However, preferred stock holders are prioritized in case the company goes belly up (bankrupt) or faces litigation disputes.
Stocks vs. Bonds
Corporations issue stocks to raise capital for business expansion, add personnel, or develop new product offerings. Ultimately, capital raised on the public markets is utilized for growth and expansion efforts, whether it be domestic or international.
Bonds are not the same as stocks. Bond owners serve as creditors to the issuing corporation, and earn an (low) interest rate on the capital they loan out to the corporation.
That said, bondholders also have unique responsibilities, privileges, and entitlements. To start, if a company goes bankrupt, creditors are the first prioritized and paid back.
>> More: Best Stock Picking Services
Who Should Invest in Stocks?
All people, regardless of race and social class should invest in stocks. With the right strategy, it is the single greatest tool all American’s have at their disposable to generate wealth.
While individual stocks may be too risky for your liking, you can also invest in ETFs, mutual funds, or index funds. These equities disperse your risk across various holdings, all at once.
Additionally, robo-advisors make this easier than ever, as technology balances your risk and financial goals, crafting the perfect portfolio.
Risks to Investing in Stocks
As noted above, if the company in question goes bankrupt, shareholders will be last in line to receive a payout. This means it is more important than ever to invest in stocks with a robust, durable business model.
Invest in Corporations with healthy balance sheets, strong leadership, and true product market fit.
But remember, investing in stocks and expecting to make money is never a guarantee. There are far too many external variables to account for.
Are Stocks or ETFs Better for Beginner Investors?
Individual stocks are riskier, which is why we recommend beginner investors to dollar-cost average across various exchange-traded funds. This will diversify your risk across several different stocks at the same time.
ETFs provide general exposure to various industries, such as technology, oil, rail road, or semi-conductor.
This broad exposure and simplicity is loved by millions of investors including Warren Buffet and Berkshire Hathaway.
However, if you are dead set on investing in individual stocks, then try to limit the percentage of your nest egg invested in any single stock to 5%. This will force you to diversify across various stocks.
Stock Definition FAQs
What Exactly is a Stock?
Search Google for “definition of stock” or “stock definition,” and you will find no shortage of results. However, many of these results fail to explain exactly what stocks are in plain English. Put simply, “stocks” represent fractional ownership of a publicly traded corporation. Anyone – meaning you and me – can own “stocks.”
How Do You Buy Stocks?
Buying stocks is now easier than ever. Anyone with a computer, an internet connection, a driver’s license, and money to invest can buy stocks through an online broker, robo-advisor, or trading platform.
Simply head over to the platform of your choice, create an account, deposit money, and begin investing.
>> More: How to Buy Stocks
Why do people buy stocks?
Let’s not beat around the bush. People buy stocks to make money. Investors are rewarded either through appreciation (stock price increases), dividend payments, or both.
That said, investing in stocks is risky and requires a game-plan.
What is a stock, and how does it work?
Individual retail investors and institutions can purchase stock of publicly-traded companies.
This allows the corporation to receive the financing it needs to grow. The investor receives partial ownership of the corporation (a stock) that has the potential to increase in value over time.
Bottom Line: Stock Definition
There you have it, this is our attempt at defining what a “stock” is. Hopefully you found it valuable. Remember, a stock represents fractional ownership in a publicly-traded company.
Stock ownership comes with risk, privileges, and responsibilities.