📈 Stonks
🪙 Crypto

↑↓ move · Enter open · Esc close

Guide

What is a stock? A plain-English guide for beginners

A share is a small piece of ownership in a company. Here's what that means, how you can make or lose money, and what to check before you buy.

By Hodlia.fi editorial team · · 5 min read

A stock (also called a share or an equity) is a unit of ownership in a company. If a company has issued 1 billion shares and you own 100, you own one ten-millionth of it. That stake gives you a claim on part of the company’s future profits and, for most common shares, a vote at shareholder meetings.

Why companies sell shares

Companies sell shares to raise money without borrowing. The first sale to the public is an initial public offering (IPO). After that, shares change hands between investors on a stock exchange such as Nasdaq or the New York Stock Exchange. The company itself does not get money from those later trades.

How you can make money

  • Price gains. If investors are willing to pay more for the shares later than you paid, you can sell at a profit. Prices move with expectations about profits, interest rates and the overall mood of the market.
  • Dividends. Some companies pay part of their profit to shareholders in cash, often every quarter. Dividends are never guaranteed. A board can cut them.

How you can lose money

A stock price can fall a long way, and it can stay low for years. If a company goes bankrupt, shareholders are paid last, after lenders and bondholders, and often receive nothing. That is why buying a single stock is riskier than buying a fund that holds hundreds.

Common vs preferred shares

Most shares you can buy through a broker are common shares. Preferred shares usually pay a fixed dividend and are paid before common shareholders in a bankruptcy, but they usually carry no vote.

Before you buy

  1. Understand the business. What does it sell, and who are its competitors? Our stock intros are a starting point.
  2. Look at size and valuation. Market cap tells you how big the company is. The price-to-earnings ratio (P/E) tells you how much investors pay for each unit of profit. See the glossary.
  3. Think about time. Money you need within a few years usually belongs somewhere less volatile.
  4. Spread your risk. Owning many companies, for example through an index fund or ETF, reduces the damage any one of them can do.

Sources

Educational content, not financial advice.