Stocks · Beginner · 5 min

What is a stock?

You can explain what owning a share means, how shareholders can earn from it, and how to calculate a company's market value.

You own a piece

Buy one share of a large company and you become, quite literally, one of its owners. A very small one, among millions of others, but an owner nonetheless.

That sounds abstract until you see what it means: a claim on part of the company's future profits, often a vote on how it is run, and a clear limit on how much you can lose. This lesson explains what a share actually is, before the rest of this rubric looks at how shares are traded, grouped and changed.

Owner, not lender

A stock, or share, is a security that gives you a piece of ownership in a company. As a shareholder, you own a small part of the company's assets and profits, in proportion to the number of shares you hold.

The SEC describes two ways shareholders can earn:

Price gains. If the company does well and other investors want its shares, the price can rise.
Dividends. Some companies pay out part of their profits to shareholders.

Most shares also give you a vote at shareholder meetings, for example on the board of directors. Later lessons in this rubric cover dividends, share classes and voting in detail.

Being an owner has a downside. Lenders, such as banks and bondholders, have a contract that says what they are owed. Shareholders have no such promise. If a company fails, creditors are paid first, and shareholders get what is left, often nothing. The SEC warns that in a bankruptcy, shares often end up worthless.

At the same time, shareholders are not liable for the company's debts. If you bought a share with your own money, the most you can lose is what you paid for it.

The value of the whole company on the stock market is its market capitalization: the share price multiplied by the number of shares. It is the number that tells you how large a company is, much more than the share price alone.

40 × 50 million = 2 billion

A fictional company has 50 million shares. Each trades at 40.

Market capitalization: 40 × 50,000,000 = 2 billion.
You buy 100 shares for 4,000. You own 0.0002% of the company.
The company earns 100 million in a year and pays half of it as dividends: 1 per share, so 100 for you.

If the share price rises to 44, your shares are worth 4,400, and the company's market value is 2.2 billion. If the company fails, your 4,000 can fall to zero, but no one can ask you for more.

Common mistakes

"A low share price means a cheap company." A company with many cheap shares can be worth more than one with few expensive shares.
"Shareholders are always paid something." Dividends are a choice of the company, not a promise.
Confusing a share with a loan. Owners carry more risk than lenders, and have no fixed claim.
Forgetting the downside. A share can lose all of its value.

The takeaway

A share is a small piece of ownership in a company. You gain through price rises and dividends, and you can lose up to what you invested.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the investor who owns part of the company.

Tap the chart.

A shareholder is a part owner. A bondholder is a lender, owed money by the company.
2A company has 50 million shares, and one share costs 40. What is its market capitalization?

Market capitalization = share price × number of shares: 40 × 50,000,000 = 2,000,000,000.
3What is the most a shareholder of a normal listed company can lose on a share bought without borrowing?

Shareholders are not liable for the company's debts. If the company fails, the share can become worthless, but no more is owed.
4In which two ways can a shareholder earn from a stock?

The SEC names both: the price can rise if the company does well, and some companies pay part of their profits as dividends.

of 4 correct.