In short: a stock (also called a share) is a small piece of ownership in one company. It can go up or down in price and some pay a dividend, but neither is promised. If the company fails, stockholders are paid last and the shares can become worthless. Buying one means taking the risk of a single company.
Many beginners ask what a stock actually is before they ask which to buy. This page answers that, step by step, with a made-up company so the numbers are easy to follow. We explain; we do not advise.
What is a stock?
A stock is a small piece of ownership in a company. Companies issue stocks to raise money, for example to grow. Whoever buys one becomes a part-owner, a shareholder. Stocks are bought and sold on an exchange, through a broker, and the price, the share price, changes throughout the day as buyers and sellers keep agreeing on what the company is worth.
You can earn from a stock in two ways. The share price can rise after you buy, so your piece is worth more; it can also fall. And some companies pay part of their profit to shareholders as a dividend; not every company does, and a company can stop. In the extreme case a company fails, its stock becomes worthless and what you put into it is gone.
What do you own when you buy a stock?
You own a share of the company, in proportion to how many shares you hold out of all the shares that exist. Owning, say, 50 of a company’s 10 million shares makes you a very small part-owner: 0.0005% of it. With ordinary shares this usually comes with three things: a claim on a share of the profit when the company decides to pay a dividend, a vote at the shareholder meeting (how much a vote counts depends on the company and the type of share), and a claim on what is left if the company is wound up. You do not own the buildings or the products. You own shares, and the company owns those.
How does a stock price get set?
By buyers and sellers on an exchange. Buyers name the highest price they will pay (the bid price), sellers the lowest they will accept (the ask price), and a trade happens where the two meet. The gap between them is the spread. News, profit reports, interest rates and what people expect all move that meeting point, so the price changes all day and can change sharply on a single piece of news.
The price tells you what one share costs, not how big the company is. For size, the market value of a company, called market capitalisation, is the share price multiplied by the number of shares. An example with a made-up Company Y: 10 million shares at €20 each make a market value of €200 million.
How do stocks pay you?
There are two ways, and neither is promised. The first is a rising share price: you can sell for more than you paid. The second is a dividend, a payment from the company’s profit. With Company Y, a dividend of €0.40 per share on your 50 shares would be €20 (50 × €0.40). The company decides each time whether to pay one and how much, and it can cut or stop it. Some companies keep their profit inside the business to grow and pay nothing. A high dividend is also not a sign of a better company; after the payment the share price usually drops by about the same amount.
Why do companies issue stock?
A company needs money to grow: to build a factory, hire people or develop a product. It can borrow, or it can sell pieces of itself. Selling shares brings in money that never has to be paid back, and in exchange the buyers become part-owners. A company’s first public sale of shares is called an initial public offering (IPO). After that, the shares trade between investors on the exchange, and the company does not receive the money from those trades.
What makes a share price go up or down?
In the long run, a share price follows what investors expect the company to earn. In the short run it also moves with news, interest rates, the mood of the market and plain buying and selling pressure, so the price can swing without anything changing in the company. This is why a share can fall right after good news (when the news was expected to be even better) and why nobody can predict the price reliably.
What happens if the company fails?
If a company goes bankrupt, what it owns is used to pay what it owes. Lenders, employees and suppliers are paid first and shareholders come last, so shareholders often receive little or nothing. In that case the shares are worth close to zero and the money you put in is lost. That is the single-company risk described below. Shares in a company that does not fail can fall a long way too, just not to zero.
What is a stock split, and does it make you richer?
A stock split divides each share into more shares to make the price per share lower. In a 2-for-1 split of Company Y, 50 shares at €20 (€1,000) become 100 shares at €10 (still €1,000). You own the same part of the same company, so you are not richer. Only the number on the price tag changed. The same happens in reverse with a reverse split.
How do you buy a stock?
You need an account with a broker, a company that places your order on the exchange. You choose the stock and an amount, then place an order, either at the market price or at a limit price you set. A trade is normally settled, meaning the money and the shares change hands, within a couple of business days. Every order has costs, and for stocks outside the euro there are currency costs as well; worked out in euros on What does buying stocks cost? Which exchange a stock is listed on, and in which currency it is traded, is shown in the broker’s order screen.
Can you lose more than you put in?
When you only buy stocks, the most you can lose is what you paid for them. Losing more than that requires borrowing to invest or trading products such as options or short positions, which are not covered here and which supervisors warn carry larger risks.
Frequently asked questions
Is a stock the same as a share?
In everyday English, yes. Both mean a unit of ownership in a company. “Share” is the more common word in Europe and “stock” in the United States; this site uses both.
Does a cheap stock mean a cheap company?
No. A low share price only means each share is a small slice. A company with a €5 share and one with a €100 share can be equally large, because what counts is the price multiplied by the number of shares.
Can a stock go to zero?
Yes. If a company fails, its shares can become worthless. This does not happen to broad index funds in the same way, because they hold many companies, but a fund can still fall in value together with the market.
Do all stocks pay a dividend?
No. Some companies pay one regularly, some irregularly and some never. A dividend is never promised, and it can be cut.