Explainer · Stock Market Basics
What is a stock, and what do you actually own?
A stock is a small slice of ownership in a company. Owning one gives you specific rights, not a say in daily decisions and not a promise of profit.
Quick answer
A stock is a share of ownership in a corporation [1]. Common stock typically lets you vote [2] and share in any dividends, but the company does not have to pay them [4]. If the company is liquidated, common holders are paid last [5].
Key points
- A share is a unit of ownership, or equity, in a company [2].
- Common shareholders typically vote to elect the board of directors and on certain corporate actions [2].
- Dividends are optional for the company [4] and can be reduced or eliminated in lean periods [1].
- In a liquidation, common stockholders are last in line [5], behind bondholders and preferred holders [1].
- You can lose money in stocks because there is no guarantee the company will grow [5].
On this page
What is a stock?#
A stock is a share of ownership in a corporation [1]. The SEC describes common stock as a security that represents an ownership interest, or equity, in a company [2]. That is why you will also hear stocks called equities.
Ownership here has a narrow meaning. You do not own a desk, a factory or a slice of the bank account. You own a claim on the company as a whole, with the specific rights the company's shares carry. Those rights are what make a share worth something.
Companies sell shares to the public to raise money. The SEC notes that a company going public is often seeking to access the capital markets to fund future growth and expansion [3]. After the IPO, investors can buy shares when they are resold in the public market [3]. How that trading works is covered in how stock exchanges work.
What rights does a shareholder get?#
The New York Attorney General lists rights that common stock buyers may be granted [1]. The word "may" matters: the exact rights depend on the company and its share class. The SEC says common shareholders typically have the right to vote to elect the board of directors and on certain corporate actions, such as takeover bids [2].
The rights most beginners should know, according to the New York Attorney General's list [1]:
Notice what is missing. A share does not let you run the business day to day or demand a payout. FINRA says a company may pay dividends but does not have to [4].
How is common stock different from preferred stock?#
All publicly traded companies issue common stock, and some also issue preferred stock [4]. Preferred stock usually comes with a fixed dividend and little or no vote [4] [1]. The comparison below uses the descriptions from FINRA, the SEC and the New York Attorney General.
| Feature | Common stock | Preferred stock |
|---|---|---|
| Voting | Typically votes on directors [2] | Generally no vote, or limited [1] [2] |
| Dividends | Optional, can be cut [4] | Usually fixed, paid first [1] |
| Place in line | Last in a liquidation [5] | Ahead of common, behind bonds [1] |
| Price swings | Moves more | Moves less than common [4] |
Sources: FINRA [4], SEC [2], New York Attorney General [1], Investor.gov [5]. Terms vary by company; read the share description in its filings.
In this guide, "stock" means common stock unless we say otherwise. Short definitions live in our glossary entries for common stock and preferred stock.
Do you really own the shares in your brokerage account?#
Yes, but often not in your own name on the company's books. The SEC explains that many brokerage firms hold your shares in "street name" unless you ask otherwise [6]. The company's records then show an intermediary, often Cede & Co., an entity affiliated with The Depository Trust Company, while your broker's records show you as the beneficial owner [6].
Your broker credits any dividends to your account and makes sure you are sent annual reports and proxy materials [6]. If you want the shares registered in your own name, direct registration holds them in book-entry form with the company's transfer agent [6]. Paper certificates are not always an option, because some issuers no longer issue them [6].
How can a stock make or lose money?#
There are two ways a stock can pay you. The company can pay a dividend, which is a portion of its profit paid to shareholders [8]. Or the share price can rise, so you sell for more than you paid. FINRA describes the second route plainly: holders of common stock share in the company's success or feel the lack of it [4].
The price is set by trading, not by the company. Strong demand from many investors tends to push a share price up, and if the company is not profitable or investors are selling, your shares may be worth less than you paid [4]. Even a well-managed, prosperous company's stock can fall when many investors sell stocks broadly [1].
| Scenario | Price per share | Value of 100 shares | Change |
|---|---|---|---|
| Price falls | $30 | $3,000 | -25% |
| Bought at | $40 | $4,000 | 0% |
| Price rises | $50 | $5,000 | +25% |
Hypothetical company, 100 shares bought at $40 (calculated). From $30, the price must rise 33.33% to get back to $40 (calculated).
What happens to shareholders if the company fails?#
Shareholders are owners, and owners are paid last. In a bankruptcy liquidation, common stockholders are the last in line to share in the proceeds [5]. Bondholders and other creditors come first, and preferred holders sit between bondholders and common holders [1].
Before you put money in, read our step-by-step guide to how to buy your first stock.
- Creditors and bondholders
Paid first from what the company has left [1].
- Preferred stockholders
Rank after bondholders but ahead of common stock [1].
- Common stockholders
Last in line to share in whatever remains [5].
Mistakes beginners make with what a stock is#
- Treating a share as a loan
Interest on bonds or CDs stays constant, while dividends on stock can be reduced or eliminated in lean periods [1]. A share is ownership with no promised payout.
- Expecting a low share price to mean a small company
Company size is market cap: share price multiplied by shares outstanding [9]. A low price can belong to a large company, as shown in market cap explained.
- Thinking SIPC covers market losses
SIPC helps when a member broker fails. It does not protect against the decline in value of your securities [7].
Frequently asked questions#
Is a stock the same as a share?
In everyday use, yes. "Stock" usually means ownership in a company in general, and a "share" is one unit of that ownership. A stock is a share of ownership in a corporation [1].
Do all stocks pay dividends?
Can I lose money on a stock?
Where can I read official information about a company?
Public companies file reports with the SEC, and the information can be found on the SEC's EDGAR system [5].
The bottom line#
A stock is a slice of ownership: a claim on the company with a short list of rights, usually including a vote and a share of any dividends, and a place at the back of the line if things go wrong. It is not a loan, not a promise and not protected against price falls. Next, see how stock exchanges work, or return to the stock market basics hub.
Sources
- Stocks | New York Attorney General.
- Glossary (SEC Office of the Advocate for Small Business Capital Formation).
- Updated Investor Bulletin: Investing in an IPO.
- Stocks.
- Stocks - FAQs.
- Investor Bulletin: Holding Your Securities | Investor.gov.
- What SIPC Protects.
- Dividend.
- Market Capitalization.
- Investor Bulletin: Understanding Margin Accounts.
Education only. This page is not investment, tax or legal advice. Stocks can lose value. See our risk disclosure.
