A simple guide to understanding stocks, how they work, and why companies issue them. Learn the basics of stock ownership and investing.
A stock (also called a "share") is a small piece of ownership in a company. When you buy a stock, you become a partial owner of that company, even if it's just a tiny fraction.
๐ก Simple Analogy: Imagine a pizza cut into 1,000 slices. If you buy one slice, you own 1/1,000th of the pizza. A stock works the same way - each stock is one "slice" of the company!
๐ Real Example: Apple has about 15.5 billion shares. If you buy 100 shares of Apple for $18,000, you own 0.0000006% of the entire company. While tiny, you're still a real owner!
When a company is created, the founders own 100% of it. As the company grows, they decide to divide ownership into many small pieces (stocks) and sell some of them to raise money.
A company decides to divide itself into millions of shares and offers them for sale to the public.
The company goes "public" and sells shares on the stock market for the first time. This is how they raise money.
After the IPO, people can buy and sell these shares among themselves on the stock market. The price changes based on supply and demand.
The price of a stock changes constantly during trading hours based on:
Companies issue stocks for several important reasons:
The main reason! Companies need money to grow, build factories, hire employees, or develop new products. Selling stocks is a way to raise large amounts of capital without taking a loan.
Money from stocks helps companies expand into new markets, acquire other businesses, or invest in research and development.
Unlike loans, selling stocks doesn't create debt. The company doesn't have to pay the money back or pay interest. They give up ownership instead.
Being publicly traded (on the stock market) makes a company more credible and visible, which can attract more customers and business partners.
๐ก Key Point: When you buy a stock, you're essentially giving the company money in exchange for a piece of ownership. You're betting that the company will grow and your piece will become more valuable.
There are two main types of stocks you should know about:
The most popular type. You get voting rights and can receive dividends (company profit sharing). Most stocks you see are common stocks.
Benefit: Higher potential returns
Risk: Last to get paid if company goes bankrupt
More like a bond. You get fixed dividends and have priority over common stockholders if the company goes bankrupt, but usually no voting rights.
Benefit: More stable, fixed income
Risk: Lower growth potential
Big, well-established companies worth over $10 billion (Apple, Microsoft, Amazon). More stable but slower growth.
Medium-sized companies worth $2-10 billion. Balance of growth potential and stability.
Smaller companies worth under $2 billion. Higher growth potential but also higher risk.
There are two main ways to profit from owning stocks:
How it works: You buy a stock at a low price and sell it later at a higher price. The difference is your profit.
Example: You buy Tesla stock at $200. A year later, it's worth $300. If you sell, you make $100 profit per share.
โ ๏ธ This is the most common way people try to make money, but it's risky because prices can go down too.
How it works: Some companies share their profits with shareholders by paying regular dividends (usually quarterly). You get cash just for owning the stock.
Example: You own 100 shares of Coca-Cola. They pay $0.50 dividend per share every quarter. You receive $50 every three months.
๐ก Dividend stocks are popular for passive income, but not all companies pay them.
๐ Best Strategy: Many investors use a combination of both - holding dividend stocks for regular income while waiting for the stock price to increase over time.
Investing in stocks can be profitable, but it comes with real risks:
Stock prices go up and down constantly. You could lose money if you sell when the price is lower than what you paid.
If a company goes bankrupt, your stocks can become worthless. You could lose 100% of your investment.
Sometimes the entire stock market drops significantly. Even good companies can see their stock prices fall.
Many investors panic and sell when prices drop, locking in losses. Fear and greed can lead to bad decisions.
๐จ Important: Never invest money you can't afford to lose. Stocks are for long-term investing (5+ years). Short-term trading is very risky and most people lose money trying it.
Choose a reputable online broker. Many now offer commission-free trading and are easy to use.
Transfer money from your bank account into your brokerage account. Start with an amount you're comfortable with.
Look for companies you understand and believe in. Read about their business, financial health, and future prospects.
Search for the company's stock symbol (like AAPL for Apple) and decide how many shares to buy. Place a "market order" to buy at the current price.
Successful investors typically hold stocks for years, not days or weeks. Be patient and don't panic during temporary price drops.
This article is for educational purposes only. It is not financial advice. All investments involve risk, including the potential loss of money.
Before investing, research thoroughly and consider your financial situation. When in doubt, consult a qualified financial advisor.