What is a stock? Owning a piece of the future

A stock is a slice of ownership in a company. Buy one share and you own a tiny piece of everything the company has: its buildings, its products, its brand and, most importantly, its future profits. You are not lending money, as you would with a bond. You are becoming a part-owner.

Why companies sell ownership

Companies need money to grow. They can borrow it, or they can sell shares to investors. The first time a company sells shares to the public is called an initial public offering, or IPO. After that, shares trade between investors on an exchange such as the New York Stock Exchange or Nasdaq, each identified by a short ticker symbol. When you buy a share in a brokerage app, you are almost always buying it from another investor, not from the company.

A worked example: Orbit Pizza

Imagine a fictional company, Orbit Pizza, with 1,000,000 shares outstanding, trading at $20 each.

Its market cap, the total value of all its shares, is 1,000,000 × $20 = $20 million.
Buy 100 shares for $2,000 and you own 100 ÷ 1,000,000 = 0.01% of the company.
If Orbit Pizza earns $2 million in profit this year, its earnings per share is $2.
If it pays owners $0.60 per share as a dividend, your 100 shares earn $60, a dividend yield of 3%.

Market cap, not share price, tells you how big a company is. A $500 stock is not "more expensive" than a $20 stock in any meaningful sense. What matters is the price relative to what each share earns.

How stock prices are set

A stock's price is simply the last price at which a buyer and a seller agreed to trade. Prices rise when buyers are more eager than sellers, and fall when the reverse is true. Underneath the noise, investors are trying to answer one question: what are this company's future profits worth today?

That is why prices react to:

Earnings reports: results that beat or miss expectations.
News: new products, lawsuits, leadership changes.
Interest rates: higher rates make future profits worth less in today's dollars.
Mood: fear and greed can push prices far from fundamentals, sometimes for years.

Over long periods, share prices have tended to follow companies' earnings. Over short periods, they mostly follow headlines and emotion. You can watch that tug-of-war play out on the news feed.

Two ways stock owners earn

Price growth: if the company becomes more valuable, your shares can be sold for more than you paid.
Dividends: some companies share profits in cash, usually quarterly in the U.S. Many fast-growing companies pay none and reinvest instead.

Together these make up your total return. Historically, reinvested dividends have been a meaningful part of long-run stock market returns.

What can go wrong

Ownership cuts both ways. If a company struggles, its shares can fall a long way. If it goes bankrupt, stockholders stand last in line, behind lenders and bondholders, and often get nothing. Even famous companies have seen their shares drop by half or more. That is why most investors own many companies at once instead of betting on a few, the idea behind index funds and ETFs. Next up: how to read a stock quote.