GlossaryConcept
Stock: What It Is and How Shares Work
A stock is a security that represents a share of ownership in a company and gives its holder a claim on part of the company's assets and profits. Shares of public companies trade on stock exchanges, where prices move with supply and demand during trading hours.
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What is a stock?
When a company needs money to grow, it has two basic options: borrow, or divide its ownership into shares and sell them to investors. The second route produces stock. "Stock" usually refers to ownership in general, while "shares" are the individual units, but in everyday use the words mean the same thing.
Buying a share makes you a part-owner. If a company's equity is split into 1 million shares and you hold 1,000 of them, you own one-thousandth of the business. Shares of listed companies are no longer printed on paper; ownership is recorded electronically through brokers and central depositories.
What owning a share means
According to the SEC's investor education site, stockholders own a portion of the company and usually have these rights:
- Voting: taking part in decisions at shareholder meetings, such as electing the board of directors.
- Dividends: receiving a share of the profits the company decides to pay out.
- Residual claim: if the company is wound up, receiving part of what is left after creditors are paid.
Most listed shares are common stock. Preferred stock usually has a priority claim on dividends and assets but limited or no voting rights. Shareholders are not personally liable for the company's debts: the most they can lose is what they invested.
How a stock price forms
The price on the screen is the last price at which a buyer and a seller agreed to trade. Over the long run, what drives it is investors' expectation of the company's future profits. The main things that change that expectation are:
- Earnings: quarterly and annual results, revenue and profit growth.
- Interest rates: higher rates lower the present value of future profits and make bonds more attractive.
- Industry and economy: demand, competition, regulation and the business cycle.
- Sentiment: optimism in a bull market and pessimism in a bear market can push prices away from fundamentals.
In the short term, news, large orders and liquidity also move prices, which is why a share can swing by several percent within a day.
IPOs, the secondary market and order types
A company first sells shares to investors in an initial public offering (IPO), and that money goes to the company. After the IPO, shares change hands between investors on the exchange. This is the secondary market, and the company does not receive money from those trades. The share price in the daily news is the secondary-market price.
Investors trade through a broker using two basic order types:
- Market order: buys or sells immediately at the best available price. It is fast, but in a thin market it may fill at a different price than expected.
- Limit order: trades only at the set price or better. It gives price control, but the order may never fill.
Besides following single shares, investors watch the market's overall direction through indices. An index tracks the average move of a group of stocks chosen by set rules; in the US the most followed are the S&P 500, covering large companies, and the technology-heavy Nasdaq-100.
Trading hours, extended hours and settlement
Shares trade normally only while the exchange is open. In the US, the regular session runs on weekdays from 9:30 a.m. to 4:00 p.m. New York time. Many brokers offer pre-market and after-hours trading, but liquidity is thinner then and spreads can widen. Exchanges are closed at weekends and on public holidays.
After a trade, the exchange of cash for shares is called settlement. US stock trades have settled on T+1, one business day after the trade date, since 28 May 2024.
Key concepts
- Market cap: share price × total shares outstanding. Example: a company with 100 million shares trading at $50 has a market cap of $5 billion.
- P/E ratio: the share price divided by earnings per share, showing how much investors pay for one unit of profit.
- Dividend yield: annual dividend per share divided by the price. Example: a $2 dividend on a $50 share is a 4% yield.
- Stock split: the company divides each share into several. The total value does not change; only the price per share falls.
Stock vs ETF vs tokenized stock vs stock perpetual
| Stock | ETF | Tokenized stock | Stock perpetual | |
|---|---|---|---|---|
| What you hold | A company share | A share in a fund holding many stocks | A token that is, or claims, a share | A derivative tracking the price |
| Voting and dividends | Yes | No vote; the fund may pay distributions | Depends on the structure | No |
| Trading hours | Exchange session | Exchange session | Often longer | Usually continuous |
| Leverage | Only on margin | Only on margin | Usually none | Yes |
| Extra risk | Market risk | Fund structure | Issuer and custodian | Liquidation and funding |
xStocks is one well-known example of tokenized stocks. For how these products relate to the traditional system, see TradFi.
US stock examples and price pages
Many of the world's largest companies are listed in the US. You can read what they do in the NVIDIA, Apple and Tesla entries, and follow their prices on separate pages:
- NVIDIA (NVDA) stock price, with chart levels in NVIDIA technical analysis
- Apple (AAPL) stock price
- Tesla (TSLA) stock price
- The full list: US stocks, ETFs and commodities prices; indicators at a glance: stocks and commodities technical summary
Company and market developments are covered under TradFi news.
Risks
- Price risk: a share price can fall sharply in a short time, and the whole investment can be lost.
- Company risk: poor management, competition or bankruptcy can take a share's value to zero.
- Dividend uncertainty: companies are not obliged to pay dividends and can cut them.
- Currency risk: an investor buying shares listed abroad is also exposed to exchange-rate moves.
Frequently Asked Questions
What is a stock?
A stock is a security representing a share of ownership in a company, giving the holder rights such as voting and a share of profits paid out as dividends.
Does buying a share make me a part-owner?
Yes. A shareholder owns a fraction of the company in proportion to the shares held, with rights such as voting, dividends and a residual claim if the company is wound up.
Why do stock prices change constantly?
Prices are set by matching buy and sell orders. Earnings, interest rates, news and overall sentiment shift the balance between buyers and sellers throughout the day.
What is the difference between a stock and an ETF?
A stock is a share in one company. An ETF is an exchange-traded fund that holds many stocks or other assets, giving exposure to a basket in a single trade.
What is the difference between a stock and a tokenized stock?
A stock is the company share itself, held through a broker. A tokenized stock is a blockchain token representing a share; its rights depend on the issuer's structure and often exclude voting.
Are 'stocks' and 'shares' the same thing?
In everyday use, yes. 'Stock' often refers to ownership in general and 'shares' to the individual units, but both describe ownership in a company.