What Is a Stock?

When you buy a stock, you are not buying a piece of paper or betting on a number on a screen. You are buying a tiny piece of a real business – its factories, brands, patents, employees and, above all, its future profits. That simple fact is the starting point for nearly everything else in this course.

Becoming a part-owner#

Picture a company as a large cake. A share of stock is one slice. If a company has issued 100 million shares and you own 100 of them, you own one millionth of the business. Legally, you are a shareholder – a part-owner of a corporation.

That stake gives you a claim on exactly the fraction you own:

• a share of the profits whenever the company pays them out as a dividend,
• a vote at the annual shareholder meeting, where shareholders elect the board and approve major decisions,
• often a right to keep your percentage when new shares are issued (pre-emptive rights are standard in Europe, less common in the US),
• and, if the company is wound up, a share of whatever is left after all debts are paid.

Limited liability – an underrated blessing#

One of the most important features of a stock is limited liability. You are only on the hook for the money you invested. If the company owes debts it cannot pay, creditors cannot come after your house or your savings. In the worst case your shares become worthless – a 100% loss, but not more.

That sounds obvious, but historically it wasn’t. Limited liability is what made it possible for millions of people to own pieces of businesses they don’t personally run.

How much is a company worth?#

A company’s stock market value is its market capitalisation:

That leads to something that surprises many beginners: the price of a single share tells you nothing about whether a company is big, small, cheap or expensive.

Stock splits: more slices, same cake#

Some companies “split” their stock when the price has risen a lot. In a 4-for-1 stock split, one share at $400 becomes four shares at $100. Your wealth doesn’t change – the cake is just cut into smaller slices. Apple did a 4-for-1 split in 2020, Nvidia a 10-for-1 split in 2024. A split can make a stock easier for small investors to trade, but it is not a reason to buy.

Different kinds of stock#

Not every share is the same. The main distinctions:

Dual-class structures are especially common in US tech. At Alphabet (Google), class A shares carry one vote, class C shares none, and the founders’ class B shares ten votes each. That lets founders keep control while owning a smaller part of the capital.

Where do stock returns come from?#

Why should a stock rise in value at all? Over the long run there are exactly three sources:

1. Earnings growth: If a company earns twice as much in ten years as it does today, it is – all else equal – worth roughly twice as much.
2. Dividends: Many companies pay out part of their profits each year. Over long periods these payments make up a large share of total returns.
3. Valuation changes: How much investors are willing to pay per dollar of earnings shifts with interest rates, mood and expectations. In euphoric phases valuations rise, in crises they fall.

In the short run – days, weeks, a few years – prices are driven almost entirely by the third source. That’s why stock prices often seem so moody. Over decades, the first two take over. That is why patient shareholders have historically done well.

The risk: companies can fail#

A company can shrink, be overtaken by rivals or simply go bust. That hurts shareholders, because they stand at the very back of the queue: employees, banks and bondholders get paid first, owners only if anything is left.

That is why diversification is one of the most important rules of all: if your money is spread across many companies, you can survive any single one failing. A whole lesson in Module 3 is devoted to it.

Buying stocks – fractions included#

You buy stocks through a broker, who holds them in your brokerage account. You used to have to buy whole shares. Today many brokers also offer fractional shares: you can put $50 into a stock that costs $400 per share. How that works, and which order types exist, is covered in the lesson on brokers and orders.

Summary#

A stock makes you a part-owner of a business. You share in its profits, get a vote and can only lose what you put in. A company’s market value is price times shares – the share price alone means nothing. Over the long run stocks rise because companies earn more and pay out profits; in the short run they swing with sentiment. And because single companies can fail, diversification belongs in your toolkit from day one.