Stock definition

What is a stock?

Stocks, also known as shares or equities, represent units of ownership in a company. Owning stock in a company makes you a ’shareholder’, which means you have a claim on a portion of the company’s assets and earnings. These are paid out as dividends, but different companies will have different approaches to how and if they pay dividends to their shareholders.

‘Stock’ is the word usually used to describe owning shares in a company. For example, you can own Apple stock by purchasing 1 share in Apple. Or, by owning 27 Apple shares, you own Apple stock.

 

Key features of stocks

Here’s some of the key information to know before you invest in stocks.

Ownership: owning stock in a company means you have a unit of ownership in the company that issued it. As a result, you have certain rights, including the right to vote at company meetings and the right to receive a portion of the company’s profits in the form of dividends.

Dividends: some companies distribute a portion of their profits to shareholders in the form of dividends. These payments are typically made on a regular basis, such as quarterly. Not all companies pay dividends. Some choose to reinvest their profit into the business to prioritise growth.

Capital appreciation: the value of a stock can go up or down over time. To profit, you’ll need to sell stock at a higher price than you paid to buy it. In the process, you’d realise what’s called a ‘capital gain’. But, if the stock’s value falls below the price you paid to buy it and you chose to sell, you’d realise a ‘capital loss’.

Ticker symbols: each stock is identified by a unique ticker symbol, which is typically a combination of letters. Ticker symbols make it easy to track and trade specific stocks on exchanges. For example, Amazon’s ticker symbol is AMZN, Microsoft’s is MSFT, and Tesla’s is TSLA.

Stock exchanges: stocks are traded on stock exchanges, which are organised marketplaces where buyers and sellers come together to buy and sell shares. Examples of stock exchanges include the New York Stock Exchange and the London Stock Exchange.

Types of stocks: there are different types of stocks, known as ‘share classes’. These include common stocks and preferred stocks.

Market capitalisation: the total value of a company’s stock in the market is known as its market capitalisation. It’s calculated by multiplying the current market price of 1 share by the total number of shares that are listed in the market.

Stock indices: stock indices (like the S&P 500 in the US or the FTSE 100 in the UK) track the performance of groups of stocks. They serve as benchmarks for the overall performance of the stock market.

Risk and return: investing in stocks carries risk. Stock prices can be volatile, and there’s no guarantee that you’ll make money. But, stocks have historically shown the potential for higher returns over the long term compared to other financial assets like cash or bonds.

Diversification: many investors choose to build diversified portfolios by investing in a variety of stocks across different sectors and industries. Diversification helps spread risk and can provide a more stable and balanced investment approach.

Stocks are a fundamental component of the financial markets and play a significant role in wealth creation and capital formation. To succeed when you invest in stocks, you’ll need a good understanding of the stock market and a long-term mindset.