A stock is a a small slice of a company which gives the owner a claim on part of its future profits. In this article, we will discuss the definition, how it works, how to buy them, and what you need to know before considering to buy.
A stock is a small slice of a company which gives the owner a claim on part of its future profits. In this article, we will discuss the definition, how it works, how to buy them, and what you need to know before considering to buy.
What Is a Stock?
A stock is a unit of ownership in a company. When you buy one, you own a small slice of that business. This may give you a claim on part of its future profits. People also call it a "share", or "equity", which all mean ownership stake in a company. Stock is one of many "securities", meaning a tradable financial asset.
Why companies issue stock
Companies sell stock to raise money. For example, let's say "Company A" wants to raise $10 million. In return, the company decides to offer 40% of public ownership to potential shareholders.
Then, the company offers one million "share", at $10 each. This means, each share is 1/1,000,000 of the shares sold to the public, which together are 40% of the company. Later on, "Company A" decides to pay out dividend, which is a portion of profit they earn in a period, to shareholders.
Unlike a loan, the money doesn’t have to be repaid and carries no interest, so a company can fund growth, build products, or pay down debt without taking on new obligations. Selling stock also lets founders and early investors turn part of their stake into cash, and lets the company pay employees with equity.
Remember that when you own a stock, it does not mean you run the company, own specific assets (building, product, or others), nor are you being guaranteed dividends, profits, or a rising price.
A company creates shares and sells them to raise money. At the beginning, companies usually sell shares to founders, employees, and preferred private investors (if any). Later, the company can sell shares to the public. Sales that raise money for the company are called the primary market.
IPO
An initial public offering (IPO) is the first time a company sells shares to the general public. After IPO, the shares will be traded on an exchange (the market), and the company is now publicly traded.
Trading on an exchange
After IPO, investors buy and sell shares among themselves on stock exchange market, like New York Stock Exchange or Nasdaq. This is called the secondary market. When you buy a share, the money goes to the investor who sold it, not to the company.
When you buy or sell stocks, the trade orders are matched through a broker. At any moment, each stock has a bid price, meaning the highest price a buyer will pay, and an ask price, which is the lowest price a seller will accept. A trade happens when the two meet.
Prices will move as supply and demand fluctuate. People may see how a company performs, how the industry sector is doing, and many other aspects before deciding what is the fair price to sell or buy the company stock. There are two ways you can earn money from stocks:
Price gains: If you sell for more than you paid, the difference is your gain. This gain becomes real money when you sell.
Dividends: Some companies pay part of their profits to shareholders, often every quarter. Dividends are decided by the company board and can be cut or stopped.
Example
You buy 10 shares at $50 each, for $500. A year later the price is $60 and the company paid $1 per share in dividends. Selling gives you $600, plus $10 in dividends, for a $110 return. If the price had instead dropped to $40, you’d be down $100 on paper before dividends. You can simulate stock return using this simulator below:
Stock Return Simulator
Stock return simulator
Types of stock
Stocks are grouped in two ways: by the legal rights they carry (common vs. preferred), and by labels that describe a company’s size, style, or behavior.
Common vs. preferred stock
Common stock
Preferred stock
Voting rights
Usually one vote per share (e.g. electing the board)
Usually none
Dividends
Can be cut/stopped
Often fixed, paid before common dividends
When the company fails
Paid last, after creditors and preferred holders
Paid before common holders
Price behavior
More volatile
Tends to move less and behaves more like a bond
Who typically holds it
Most everyday investors
Income-focused investors and institutions
Common stock is what most people mean when they say “stock.” It offers the most potential for price growth, but holders are last in line for payment if things go wrong.
Preferred stock is put ahead of common stock for dividends, and also when the company fails. In exchange, preferred stock holders usually give up voting rights. Preferred shares are less common, so check with your broker for the details of each. Some companies also issue more than one class of common stock (for example, Class A and Class B), where one class may carry more votes than the other.
Common labels on stocks
There are terms that investors and analysts usually use to describe stocks, and these may help you in considering which stocks suit your needs. Remember that one stock may fit two or more labels. No one type of stock is better than the others, as they each carry their own risks and advantages.
Growth stocks: These are companies expected to grow faster than average. They often reinvest profits instead of paying dividends, and their prices can be more volatile.
Value stocks: Companies that are believed to be priced cheaply relative to their earnings or assets. The market may be underrating them, or they may be cheap for legitimate reasons.
Dividend stocks: Companies with a history of paying regular dividends, although it is never guaranteed.
Large-cap stocks: Companies with a large market cap, commonly defined as $10 billion or more. They tend to be less volatile.
Mid-cap and small-cap stocks: Medium and smaller companies. They can offer more room to grow but are generally more volatile and harder to value.
Blue-chip stocks: Large and long-established companies with a record of stable earnings.
Bear in mind that these labels are not hard definitions; there is no rule on which stock is which, and every label is just a general consensus.
The risk of loss
There is no such thing as guaranteed return(s). A stock price can fall below what you paid, and a company can cut its dividend. If a company fails, shareholders can lose most or all of their value.
Outstanding shares
Outstanding shares are the shares currently held by investors. This includes the public, institutions, founders, employees, and company insiders. This is the number that shows you how much of a company you get, per share. You can read this data on the company annual (10-K) or quarterly (10-Q) report.
Market capitalization (market cap)
Market cap is the share price, multiplied by number of outstanding shares. To illustrate, let's say "Company A" has these numbers:
Authorized shares: 10,000,000
Outstanding shares: 5,500,000
This means if the stock trades at $20, the market cap is 5,500,000 × $20 = $110,000,000. If the price rises to $25, the market cap becomes $137,500,000. Take note on how the share count didn’t change, and only the price moves.
Why stock prices move
Stock prices move according to demand and supply in the market. Remember that there is only a limited amount of stock units, and when many people want some, the price goes up. The opposite also happens when people don't want to hold the stock anymore, then its price goes down.
There is no certain telling when a price would go up or down. But there are some factors which, generally, may move the prices:
Company earnings: financial reports show whether the business is growing and/or making profit. A stock usually moves when the results exceed ("beat") or miss investors' expectations.
Interest rates: Higher interest rates make lower-risk investments like bonds more attractive, and people may switch their money out of stocks.
News: Industry changes, product launches, lawsuits, leadership changes, regulations, and others can swing prices.
Wider economy: Inflation, employment, and economic growth will affect most companies and their stocks.
Investor sentiment: Fear and optimism can impact prices, especially in the short term.
What volatility means
Volatility means how much, and how quickly, a price moves up and down. A stock that swings 5% in a day is more volatile than one that moves 0.5%. The most common measure is standard deviation, which describes how far a stock deviates from their average. Other measures include Beta, which indicates how much a stock tends to move compared with the overall market, and The VIX, which is an index of expected volatility in the S&P 500 over the next 30 days.
Stock options
An option is a contract that gives you the right (not the obligation) to buy or sell a stock at a certain price before an expiry date. An option is not a stock, but a contract over a stock.
How people buy their first stock
Step 1: Open a brokerage account
A broker is a licensed firm that places trades for you on an exchange. To open an account, choose a broker that is licensed and regulated in your country.
Step 2: Fund the account
Once your bank account is linked, you transfer money into the brokerage account.
Step 3: Choose a stock and place an order
You search for a company by name or ticker symbol, then place an order. Two most common orders are:
Market order: buys right away at the best available price.
Limit order: buys only at the price you set or better.
Whole shares vs. fractional shares
Whole shares: you buy complete units. If a stock trades at $300, you need at least $300 for one share.
Fractional shares: you buy a portion of a share, usually by specifying a dollar amount. With $30, you could own 0.1 of a $300 share.
Bear in mind that every investment carries its own risk, and no profit is guaranteed.
Ticker symbols
A ticker symbol is a short code of letters, identifying a stock on an exchange, such as AAPL for Apple and MSFT for Microsoft. Searching by ticker is more accurate and prevents mistakes such as picking the wrong company or the wrong stock class. Alphabet, for example, trades as GOOGL (Class A, with voting rights) and GOOG (Class C, without voting rights).
American Depositary Receipts (ADRs)
Most foreign companies that trade in the US do so through American Depositary Receipts (ADRs). An ADR is a certificate issued by a US bank that represents one or more shares of a foreign company, or a fraction of one. Taiwan Semiconductor Manufacturing (TSM), for example, trades in the US as an ADR, with each ADR representing five of its shares listed in Taiwan.
An ADR’s price follows the company’s share price in its home market, converted into dollars and adjusted for the ADR ratio. There is a few things to check before buying such foreign stocks:
Currency: exchange-rate moves can change the ADR’s value.
Fees: the depositary bank may charge custody fees, often deducted from dividends.
Taxes: the company’s home country may withhold tax on dividends before they reach you.
Stock splits
A stock split increases the number of shares a company has without changing what the company, or your stake, is worth. In a two-for-one split, 100 shares at $100 each become 200 shares at $50 each: your holding is still worth $10,000. Dividends per share fall in the same proportion. Nvidia’s ten-for-one split in June 2024 is a recent example.
A reverse split works the other way: shares are combined, so you hold fewer shares at a higher price, again with the same total value. A split on its own does not make a company more or less valuable.
Spreading your risk
Because any single stock can fall, many investors spread their money across different companies and sectors (diversification), and some invest a fixed amount at regular intervals regardless of price (dollar-cost averaging). Both can help manage risk, but neither guarantees a profit or protects against a loss.
Sources
U.S. Securities and Exchange Commission, Investor.gov. “Stocks.” www.investor.gov
U.S. Securities and Exchange Commission, Investor.gov. “Form 10-K.” www.investor.gov
U.S. Securities and Exchange Commission, Investor.gov. “American Depositary Receipts (ADRs).” www.investor.gov
U.S. Securities and Exchange Commission, Investor.gov. “Stock Split.” www.investor.gov
NVIDIA Corporation. “NVIDIA Announces Financial Results for First Quarter Fiscal 2025,” May 22, 2024. nvidianews.nvidia.com
U.S. Securities and Exchange Commission, Investor.gov. “Diversification.” www.investor.gov
U.S. Securities and Exchange Commission, Investor.gov. “Dollar Cost Averaging.” www.investor.gov
FAQ
What is a stock in simple terms? A stock is a unit of ownership in a company. When you buy one, you own a small slice of the business and have a claim on part of its profits, but not on its assets directly.
What is the difference between a stock and a share? “Stock” is the general term for ownership in a company, while a “share” is a single unit of that ownership. The two are often swapped.
How do stocks make money? Holders can earn in two ways: price gains, when they sell for more than they paid, and dividends, which are a share of profits some companies pay out. Neither is guaranteed.
Can you lose all your money in stocks? Yes, you can lose the full amount you invested if a company fails and its shares become worthless.
What does market cap mean, and why does it matter? Market cap is the share price multiplied by the number of outstanding shares, and it shows how much the market values a company in total.
Are stock options the same as stocks? No. An option is a contract that gives you the right to buy or sell a stock at a set price before a set date, and it doesn’t make you own a slice of the company.
What is an ADR?
An ADR is a certificate traded on a US exchange that represents shares of a foreign company.
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.
Sindhu Partomo is a copywriter and content writer with 8+ years of experience in agencies, B2B, and SaaS. He has been writing about business and finance since 2023, and holds a bachelor degree from University of Indonesia.
Hendrie Saputra holds a Master of Business Administration (MBA) with a concentration in Business Risk & Finance, along with professional experience in finance, marketing, and project management. He is experienced in analyzing market data and developing research-driven business strategies.
