Stock

Quick definition

A stock is a portion of a publicly-traded company that you can invest in.

Key details

• Investors buy stocks to be able to own shares in some of the most successful companies in the world
• As a stock value increases over time, so does the value of an investor’s initial investment
• Companies sell shares in order to raise money to fund future growth operations and they do so through a process called an Initial Public Offering (IPO)

What is a stock?

A stock is a piece of a company that you can buy on the stock exchange. It helps to think of stock ownership in terms of slicing a pizza. The publicly-traded company is the whole pizza and when you buy a stock, you are buying a slice that is a fraction of the whole pizza. 

As the company grows so does the value of your investment into the company stock. Therefore, the better the company performs, so does the investment made by the investor. Inversely, if the company underperforms, so does the initial stock investment. 

Stocks have historically outperformed other investments in the long run, attracting plenty of investor interest. You can invest in stocks on stock exchanges through a brokerage. You must always do your own due diligence before investing in a stock and choosing the broker that is right for you.

Types of stocks

Common and preferred stocks are the two main types of stocks. They both offer distinct benefits:

• Common stock. Owning a common stock means that you are entitled to vote at the company’s shareholders’ meetings and to receive benefits paid out from the company’s profits.
• Preferred stock. Owning a preferred stock means that although you do not have any voting rights, you have a preferential claim to the company’s assets and earnings.

Stock value

The issue of new shares and the buyback of old shares are the two main ways by which a company manages its stock value. An IPO refers to the first time a company sells its shares on the stock market and it retains the option to sell additional ones at any time.

Companies can issue new shares when they need to raise funds. Issuing new shares dilutes the ownership fraction and rights of existing shareholders. In this scenario, a shareholder has the option to buy newly issued shares in order to reinstate their position. 

Companies also initiate a buyback of stock where they repurchase issued shares. This is done to raise the value of their shares and boost shareholder confidence. Although relatively rare, this is an ideal scenario for an investor as the value of their stock investment increases in a stock buyback.