Stock
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Join →What Is a Stock?
A stock represents an ownership interest in a company. When we own shares of a company, we own a small portion of that business. The size of that ownership depends on the number of shares we hold relative to the total number of shares outstanding.
Stocks are issued by companies to raise capital. Investors can then buy and sell those shares in the secondary market. The market price changes as buyers and sellers continuously interact.
Why Do We Trade Stocks?
We may trade stocks because we expect their market price to move. The reasons for those movements can include company performance, expectations about future earnings, economic conditions, interest rates, sector developments, market sentiment, and changes in supply and demand.
Basic Stock Characteristics
- Ownership: a share represents a proportional ownership interest.
- Price: the market determines the current trading price.
- Liquidity: heavily traded stocks can generally be entered and exited more easily.
- Volatility: different stocks can experience very different price fluctuations.
- Risk: the value of a stock can fall substantially, including to zero in an extreme company failure scenario.
Example
If a company has 1,000,000 shares outstanding and we own 1,000 shares, our proportional ownership is 0.1%. The fact that we own shares does not mean that we control the company; the significance of our ownership depends on the company’s share structure and the rights attached to the shares.
Key Terms
Stock, share, equity, shareholder, shares outstanding, market price, liquidity, volatility.
Knowledge Check
- What does a stock represent?
- Why can a stock’s market price change even when the company itself has not changed materially that day?
- Why are liquidity and volatility relevant to a trader?