A stock is a security that represents a fractional ownership interest in a company. The company divides its ownership into units called shares, and anyone who holds them owns a slice of the business, with a claim on part of its profits and assets after all creditors have been paid. Stocks are also called equity or equities, because they stand for the owners' stake rather than money the company has borrowed.
Companies issue stock to raise capital without taking on debt, and investors buy it hoping to earn a return from dividends, a rising share price, or both. Stocks are one of the main asset classes, alongside bonds and cash. In the United States the Securities and Exchange Commission (SEC) regulates how stock is offered and traded; in the UK the Financial Conduct Authority (FCA) plays that role, and in the EU national regulators work under rules coordinated by the European Securities and Markets Authority (ESMA).
Stock in plain terms
Imagine a group of friends who buy a food truck together. If ten people each put in an equal amount, each owns a tenth of the truck. When the truck makes money, they can share the profit or put it back into the business. If someone wants out, they can sell their tenth to a newcomer, at whatever price the newcomer is willing to pay.
A stock works the same way, only on a much larger scale. A big company may be split into billions of pieces, and those pieces change hands every second on a stock exchange. The owners do not run the company day to day; they choose a board to oversee the managers. Their reward depends on how well the business does and on what other people think a piece of it is worth.
How stocks are issued
A company's first shareholders are usually its founders, early employees and private backers such as venture capital and private equity funds. Early funding may also arrive through instruments that convert into shares later, such as a simple agreement for future equity (SAFE) or a convertible bond, or through equity crowdfunding.
When a company wants to sell shares to the general public for the first time, it holds an initial public offering (IPO). In the US it must register the offering with the SEC and give investors a prospectus describing the business, its finances and its risks. After listing, the company can raise more money through follow-on offerings, and it can also shrink its share count by buying back stock. Each new issue dilutes existing owners unless they buy their share of it.
Many shares carry a nominal par value that has little to do with what they trade for; it is mainly an accounting and legal figure.
How stocks are traded
The IPO is the primary market, where the company itself receives the money. After that, shares change hands between investors in the secondary market, and the company receives nothing from those trades. Most trading happens on a financial exchange such as the New York Stock Exchange or the Nasdaq, each share identified by a ticker symbol. Investors place orders through a broker, using instructions such as a market order or a limit order, and the exchange matches buyers and sellers in its order book. That constant matching is how the market sets a price, a process known as price discovery.
After a trade, ownership and cash must change hands. In the US, stock trades settle one business day after the trade date (T+1), a rule that took effect on 28 May 2024 after decades at T+3 and then T+2. The EU and the UK have both set 11 October 2027 as the date for their own move to T+1. Most shares today are held electronically through a central securities depository rather than as paper certificates.
Main types of stock
- Common stock. The ordinary form of ownership, usually with voting rights and a residual claim on profits; see Common Stock.
- Preferred stock. A class that ranks ahead of common stock for dividends and in a liquidation, usually without votes; see Preferred Stock.
- By size. Investors group companies by market capitalization into large-cap, mid-cap and small-cap stocks.
- By style. A growth stock is priced for fast expansion, a value stock looks cheap against its earnings or assets, and a blue chip stock belongs to a large, long-established company.
Investors can own stocks directly or indirectly, through a mutual fund or an exchange-traded fund (ETF) that holds many companies at once. The overall direction of a market is tracked by a stock market index such as the S&P 500.
Returns and risks
A stockholder's return comes from two sources: dividends paid out of profits, and a capital gain if the shares are sold for more than they cost. Added together, these make up the total return. Over long periods, broad stock markets have historically returned more than bonds or cash, which is the reward for bearing more risk.
That risk takes several forms. Share prices can swing sharply from day to day, a feature measured as volatility. Whole markets can fall together in a bear market, a form of market risk that spreading money across many companies cannot remove. And because shareholders are paid last, a company that fails can leave its stock worthless. Investors manage these risks through diversification, by matching their holdings to their risk tolerance and by holding stocks over a long time horizon. Owning stock also brings rights, covered under Shareholder (Stockholder).