If you are just starting your investing journey, you will hear the word "stock" everywhere. Stocks are the foundation of most portfolios and the main way many people build long term wealth. Understanding what a stock is, how it works and why companies issue them will make every other investing concept easier.
This guide walks through the basics in clear, practical language, using real world examples from the US stock market.
What Is A Stock?
A stock is a unit of ownership in a company. When you buy a stock, you become a shareholder. That means you own a small slice of the business and are entitled to a share of its profits and assets.
Example:
If a company has 100 million shares outstanding and you own 100 shares, you own 0.0001 percent of that company. The percentage is tiny, but the ownership is real.
In simple terms:
- The company is the whole pizza
- The shares are the slices
- Your stock holdings are the slices you own
How Do Stocks Work?
1. Stocks are issued to raise money
Companies issue shares to raise capital for things like:
- Expanding into new markets
- Developing products
- Hiring more staff
- Reducing debt
Private companies do this first through private funding. Later, they can list on a stock exchange in an Initial Public Offering (IPO). After that, their shares trade freely between investors on public markets.
2. Stocks trade on exchanges
Once a company is public, its shares trade on stock exchanges such as:
- New York Stock Exchange (NYSE)
- Nasdaq
You cannot walk into the exchange and buy directly. You use a broker or investing app that connects you to these markets and executes your orders.
3. Price is set by supply and demand
A stock price moves up and down as buyers and sellers place orders. If more people want to buy than sell, the price tends to rise. If more want to sell than buy, the price tends to fall.
Short term moves can be noisy and emotional. Over the long term, prices often follow the company’s actual performance and profits.
How Can You Make Money From Stocks?
There are two main ways investors earn returns from stocks.
1. Capital gains
This is the profit you make when the stock price goes up.
- You buy 1 share of Company A at 100 dollars
- Later you sell it at 140 dollars
- Your capital gain is 40 dollars, before fees and taxes
2. Dividends
Some companies share part of their profits with shareholders through cash dividends.
- If a stock pays 2 dollars per share per year and you own 50 shares, you receive 100 dollars in dividends per year, before taxes
- You can withdraw this cash or reinvest it into more shares to benefit from compounding over time
Not all companies pay dividends. Fast growing tech companies often reinvest profits into the business instead.
Types Of Stocks You Will Hear About
Common vs preferred stock
- Common stock
Most listed shares are common stock. Holders usually get voting rights and may receive dividends if the company decides to pay them. - Preferred stock
A special class that often has priority for dividends and assets if the company is liquidated, but usually has limited or no voting rights. Retail investors mainly deal with common stock.
Blue chip, growth and value stocks
These are not legal categories, but useful labels that describe style.
- Blue-chip stocks
Large, stable companies with strong reputations and longer track records. Examples often include names like Apple, Microsoft or Coca Cola. - Growth stocks
Companies expected to grow revenue and earnings faster than the market. They often reinvest profits rather than pay high dividends. - Value stocks
Companies that appear undervalued relative to their fundamentals. Investors buy them hoping the market will eventually recognise their true worth.
Many long term portfolios mix blue chip, growth and value names for balance.
Why Do People Invest In Stocks?
Stocks are popular for several reasons:
- Long term growth potential
Over long periods, stock markets have historically delivered higher returns than cash or many other assets, although there are no guarantees. - Ownership in real businesses
You participate in the success of companies you know and use every day, from consumer brands to tech platforms. - Liquidity
Public stocks are relatively easy to buy and sell during market hours. - Diversification
By holding shares across different sectors and companies, you can spread risk instead of betting on a single business.
With modern brokers and apps that offer fractional shares, you do not even need to buy a whole share of high priced companies. You can start with small amounts and build positions over time.
Conclusion
A stock is simply a small slice of ownership in a real company. When you buy shares, you are tying your money to that business’s future profits, growth and risks. Over time, stocks can help you build wealth, as long as you stay diversified, patient and informed.
If you are ready to move from theory to practice, you can start exploring US stocks in small amounts through the Gotrade app, using fractional shares to learn as you go and build your portfolio step by step.
FAQ
- What is a stock in simple terms?
A stock is a piece of ownership in a company. When you buy a share, you own a small part of that business. - Are stocks and shares the same thing?
Yes. In everyday use, “stock” and “share” both refer to units of ownership in a company. - Is investing in stocks risky?
Yes. Stock prices can go up or down and you can lose money. That is why diversification, a long term view and proper research are important.
Disclaimer:
Gotrade is the trading name of Gotrade Securities Inc., which is registered with and supervised by the Labuan Financial Services Authority (LFSA). This content is for educational purposes only and does not constitute financial advice. Always do your own research (DYOR) before investing.
