A stock is a small piece of ownership in a company

When you buy a stock, you own a share of that company. If a company issues 1 million shares and you own 100 of them, you own 0.01% of the company. That ownership stake is real — it means you have a claim on the company's profits, and in some cases a say in how it is run.

Companies sell stock to raise money. Instead of borrowing from a bank, a company can divide itself into pieces and sell those pieces to the public. The people who buy those pieces become owners alongside the company's founders and early investors. This is why stock is sometimes called equity — it represents a piece of the ownership pie.

Stock is different from a bond or a loan. When you lend money to a company by buying a bond, the company owes you that money back plus interest. When you buy stock, you own a piece of the company itself. If the company does well, your stock may become worth more. If the company fails, your stock may become worthless.

Key Takeaways

  • Buying stock means owning a percentage of a company, and that ownership is real — you have a claim on profits and sometimes a vote on company decisions.
  • Stock prices move based on what investors think the company will earn in the future, not just what it earns today.
  • You can buy stock through a brokerage account, which is a service that connects you to the stock market and holds your shares.
  • Stocks are riskier than bonds or savings accounts because a company's value can drop sharply, but historically they have grown faster over long periods.
  • Dividends are payments some companies make to shareholders from their profits, but not all stocks pay them.

Why stock prices go up and down

Stock price is set by supply and demand — the same force that sets the price of anything else. If many people want to buy a stock and few people want to sell it, the price goes up. If many people want to sell and few want to buy, the price goes down.

But what makes people want to buy or sell? Mostly, it is what they think the company will earn in the future. If a company announces strong sales, investors expect higher profits ahead, so they buy the stock and the price rises. If a company announces layoffs or lost customers, investors expect lower profits, so they sell and the price falls. The stock price is really a bet on the company's future, not a measure of what it is worth today.

This is why stock prices can swing wildly. A single piece of news — a new product, a lawsuit, a change in leadership, a shift in the industry — can shift what thousands of investors think about a company's future. That shift in opinion moves the price. Over weeks or months, the price may bounce around. Over years, the price of a healthy company tends to rise as the company grows.

How to buy and hold stock

You cannot walk into a store and buy stock. Instead, you open an account with a brokerage — a company that buys and sells stocks on your behalf. Common brokerages include Fidelity, Charles Schwab, E-Trade, and Robinhood. You deposit money into your brokerage account, then use that money to buy shares of any publicly traded company.

When you place an order to buy stock, the brokerage finds a seller and executes the trade. Your shares are held in your account. You can sell them whenever you want during market hours — usually 9:30 a.m. to 4 p.m. Eastern time on weekdays. When you sell, the brokerage deposits the money into your account, and you can withdraw it or use it to buy other stocks.

Most brokerages charge a small fee for each trade, though many have dropped their per-trade fees to zero in recent years. Some charge a monthly account fee if your balance is below a certain amount. Read the fee schedule before you open an account, because fees add up over time.

Dividends and what they mean for you

Some companies pay dividends — regular cash payments to shareholders from company profits. A company might pay a dividend of $0.50 per share four times a year, so if you own 100 shares you receive $50 each quarter. Dividends are not may provide; a company can cut or eliminate its dividend if profits fall.

Dividends are one way to make money from stock. The other way is capital appreciation — the stock price goes up and you sell it for more than you paid. Some stocks pay high dividends and grow slowly. Others pay no dividend but grow fast. Some do both. What matters to you depends on whether you need income now or want to build wealth over time.

When a company pays a dividend, the stock price usually drops by roughly the dividend amount on the payment date. This is not a loss — you receive the cash, so your total value stays about the same. But it means the stock price alone does not tell the whole story of your return.

Risk and why stocks are not for money you need soon

Stock is riskier than a savings account or a bond. A savings account is insured by the government up to $250,000, so your money is safe. A bond is a loan to a company or government, and you get your money back on a set date. Stock is ownership, and ownership can lose value fast.

If a company's business falls apart, the stock can drop 50%, 80%, or even to zero. If you need the money in a year and the stock is down 40%, you have to decide whether to sell at a loss or wait and hope it recovers. This is why financial advisors say not to buy stock with money you will need within five years.

Over long periods — 10 years, 20 years, a lifetime — stocks have historically returned more than bonds or savings accounts. But that return comes with volatility. The stock market drops 10% or more several times per decade. If you can stay invested through those drops, you have historically come out ahead. If you panic and sell during a drop, you lock in the loss.

Public vs. private stock and how to find companies to buy

Public stock is stock in a company that trades on a stock exchange — a marketplace where shares change hands. The New York Stock Exchange and NASDAQ are the two largest in the United States. Any person can buy public stock through a brokerage. Private stock is stock in a company that does not trade publicly. Private stock is harder to buy and sell, and usually only founders, employees, and wealthy investors own it.

When you open a brokerage account, you can search for any publicly traded company by its ticker symbol — a short code like AAPL for Apple or MSFT for Microsoft. You can also search by company name. Most brokerages show you the current price, recent price history, and basic information about the company before you buy.

Picking which stocks to buy is a separate skill. Some people research individual companies and pick stocks they think will do well. Others buy index funds or exchange-traded funds — baskets of many stocks that track a market index like the S&P 500. Index funds are simpler and less risky than picking individual stocks, because your money is spread across hundreds of companies instead of a few.

How stock relates to bonds and other investments

Stock is one type of investment. Bonds are another — they are loans to companies or governments that pay you interest. Savings accounts and money market accounts are safer but pay less. Real estate, commodities, and other assets are different categories altogether.

Most financial advisors suggest owning a mix of stocks and bonds, with the balance depending on your age and goals. A younger person with 30 years until retirement might own 80% stocks and 20% bonds, because they can ride out stock market drops. An older person close to retirement might own 40% stocks and 60% bonds, because they need stability and cannot wait for a market recovery.

The mix is called your asset allocation. Rebalancing it — selling some stocks and buying bonds, or vice versa — keeps your portfolio aligned with your risk tolerance as you age and as markets move.

Frequently Asked Questions

Do I have to own a lot of stock to make money?

No. You can buy a single share of a stock, and many brokerages now allow fractional shares — meaning you can buy $50 worth of a $200 stock without owning a full share. Your return is proportional to how much you own. If you own one share and the stock goes up $10, you make $10. If you own 100 shares, you make $1,000.

What happens to my stock if the company goes bankrupt?

Your stock becomes worthless. Shareholders are last in line when a company's assets are sold off — creditors and bondholders get paid first. This is why stock is riskier than bonds. However, bankruptcy is rare for large, established companies.

Can I lose more money than I invested?

No, not with regular stock. The worst case is the stock goes to zero and you lose your entire investment. You cannot owe money to the brokerage. (This is different with options and margin trading, which are advanced strategies.)

How often should I check my stock price?

That depends on your strategy. If you are buying stock to hold for years, checking once a month or once a quarter is enough. Checking every day can tempt you to sell during normal price swings. If you are trading frequently, you will check more often, but frequent trading usually costs more in fees and taxes than it gains.

Is stock the same as cryptocurrency?

No. Stock represents ownership in a real company with revenue, employees, and assets. Cryptocurrency is a digital currency with no underlying company or cash flow. They are both traded on exchanges and both volatile, but they are fundamentally different assets.