What is a Stock?

Many people are curious about stock ownership and investing in the stock market, but they aren’t sure where to begin their education. If you’ve been watching the news and asking yourself, “What is a stock,” this beginner’s guide will help you get started understanding the stock market. 

What is a Stock?

A stock is a security that represents ownership in a publicly traded company. When you purchase stock, you will purchase individual shares, each of which represents your proportional investment in the company. When you own a share of stock, you are entitled to a proportion of a company’s assets. If you own more shares of stock, you have a larger stake in the company. For example, if a company issues 100,000 shares of stock and you purchase 10,000 shares, you would have a claim to 10% of the company’s assets.

Companies issue shares of stock to raise money to fund new projects and pay off debt. Only select companies that have met rigorous licensing and financial criteria may trade shares of stock on major stock exchanges. This is advantageous for you as an investor because you know that the company you’re buying shares from has met Securities and Exchange Commission (SEC) standards to maintain a listing.

Keep in mind that buying shares of stock does not mean that you own the company itself; it only means that you have a claim to a proportion of the company’s assets equal to the number of shares you own. Corporations are organized in a way that they can file taxes, own property and hold assets. As a shareholder, you own shares of stock that represent the company’s assets, but you do not own physical commercial property.

This structure protects both you and the company — if a company goes bankrupt, your personal assets are not at risk because you have limited liability as a shareholder. You cannot even be forced to sell your shares of stock in the company, though shares of a bankrupt company will be essentially worthless.  

In most cases, stocks are bought and sold through companies called brokers. A broker is a company or individual authorized to buy and sell stocks on your behalf according to your instructions. With few exceptions, any legal resident can open a brokerage account and begin to buy and sell shares of stock online. 

How to Identify Stocks

Stocks are identifiable by their stock symbol, commonly referred to as a ticker. The ticker of a stock is a short set of characters issued to a publicly traded company so investors can quickly identify and trade shares. Each ticker is unique to the company it’s assigned to. For example, the ticker for Tesla Inc. is TSLA — no other company trading on the exchange Tesla trades on will have the ticker TSLA.

You’ll also usually see a stock’s exchange preceding its listing when reading publications. For example, you might see information on Tesla listed as (NASDAQ: TSLA). This simply means that you can find Tesla’s shares of stock trading on the Nasdaq Stock Market. Some other popular exchanges that you might see include the New York Stock Exchange (NYSE) and the NYSE American Small Cap Equity Market (AMEX). 

Which Companies Sell Public Shares?

When you buy shares of stock on a major exchange, you are buying into a publicly traded company. A publicly traded company is one that has met the SEC’s criteria for public sale. These companies must adhere to SEC regulations. For example, publicly traded companies are required to issue quarterly and annual financial statements so investors can make informed decisions about whether to buy or sell shares of a company’s stock.

Publicly traded companies are not publicly owned. No government body controls or owns these companies. Instead, the “public” in “publicly traded” refers to the fact that anyone can buy and sell the company’s shares.

Many of the major brands that you see and hear about every day are publicly traded companies. Some of the largest publicly traded companies include Amazon.com Inc. (NASDAQ: AMZN), Apple Inc. (NASDAQ: AAPL) and Visa Inc. (NYSE: V). You can learn whether a company you’re interested in investing in is publicly traded by browsing the stock directory of the New York Stock Exchange or the Nasdaq. Almost every major publicly traded company’s stock can be found on one of these exchanges. 

What is the Stock Market?

Stock market is a broad term that encompasses the buying and selling of shares of stock issued by publicly traded companies. These trades take place either in person or online via an exchange. Each exchange has its own sets of standards and rules that companies must adhere to in order to list their shares on the exchange. Stock markets are regulated environments overseen by government bodies. In the United States, the government bodies that oversee and regulate the stock market are the SEC and the Financial Industry Regulatory Authority (FINRA).

The terms “stock market” and “stock exchange” are sometimes used interchangeably. However, the term “stock exchange” refers to a specific exchange that is part of the overall stock market. The two largest stock exchanges in the United States are the New York Stock Exchange and the Nasdaq Stock Market. 

What are the Benefits of Stock Ownership?

Investing in stocks can come with a multitude of benefits, including:

• Increased returns: Over the past 140 years, the stock market has returned an average of 9.2% annually. The reason most retirement savings accounts are based on stock investments is because the market has shown a long history of solid returns as long as you diversify your holdings. 
• Dividends: A dividend is a distribution of a portion of a company’s profits issued to shareholders on an annual, monthly or quarterly basis. Though most companies are not required to issue dividends, many companies choose to offer them to attract investors. Dividends can help you compound your initial investment — especially if you take advantage of a dividend reinvestment program that uses your dividend to purchase more shares of the underlying stock.
• Better pace with inflation: The United States normally can expect to see about a 2% increase in inflation annually. Unfortunately, the average savings account in the United States has an interest rate of only 0.04%. This means that leaving your money in your bank account can actually result in a lower value because of inflation than you would have seen if you’d invested it in the stock market. 

What are the Drawbacks of Stock Ownership?

Though investing in the stock market offers a host of benefits, it also comes with a few potential drawbacks.

• Possible short-term losses: Though the market has historically returned a little more than 9% annually, individual years can fluctuate. This means that if you’re investing over a short-term period, it’s possible you will lose money. This is especially true if you plan on buying and selling penny stocks or day trading.
• Buying individual stocks is risky: From international airline Pan American World Airways to energy powerhouse Enron Corp., even major companies are not immune to bankruptcy. If you invest in a single stock and the company eventually goes bankrupt, the shares that you hold will essentially become worthless. You can avoid taking on such a large risk by investing in an index fund or an exchange-traded fund (ETF) instead of shares of a specific company.
• May have limited routes to withdraw money: If you’re investing through a retirement account like a 401(k) or an individual retirement account (IRA), you may enjoy tax benefits that allow you to deduct your contributions from your taxes or to avoid paying taxes when you withdraw your funds. However, as a condition of claiming these benefits, you will be limited in when you can sell your investments.

For example, if you withdraw funds from your 401(k) before you reach retirement age, the IRS will assess a 10% penalty to your withdrawal in most cases. This is part of the reason you should maintain both a retirement investment portfolio as well as an emergency fund that you can easily access without penalty. 

Compare Online Stock Brokers

The first step to beginning your investment journey is by opening an account with a brokerage. Your stock broker will provide you with a platform that you can use to submit buy and sell orders, which your broker will execute on your behalf. If you don’t already have a brokerage account, you may want to consider beginning your search with the recommended brokers below. 

Today's Top Stocks

Getting Started in the Stock Market

Though investing in the stock market is often framed as glamorous and risky in popular media, the truth is that there are many ways to invest in the stock market that come with relatively lower risk. For example, when you invest in a fund, you split your investment between dozens and sometimes hundreds of companies. This means that if one of the companies in your funds begins to perform poorly, you won’t lose a major portion of your investment. Investing conservatively and taking a long-term approach to your investments can help you build a solid portfolio with an eye toward the future.  

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