What Is a Stock? Shares, Ownership and Why Companies Go Public

A stock, also called a share or equity, is a small slice of ownership in a company. If you own shares you own part of the business: you benefit when its profits grow (through a rising share price and dividends), and if you have not borrowed money, the most you can lose is what you paid. Companies sell shares to the public to raise money, and after that the shares trade between investors on a stock exchange such as the NYSE or Nasdaq.

What owning a share actually means

When a company is formed, its ownership is divided into units called shares. A large listed company may have billions of them. Owning one share of a company with one billion shares means you own one billionth of it. That small piece usually comes with:

• A claim on profits. Profits belong to shareholders. The board can pay part of them out as dividends (cash payments per share) or keep them to grow the business.
• Voting rights. Common shareholders usually vote on the board of directors and major decisions such as mergers, normally one vote per share. Some companies have several share classes with different voting power, so check before you assume.
• Limited liability. You are not responsible for the company's debts. If it fails, you lose your investment but nobody can come after you for more.
• A place at the back of the queue. If a company is wound up, lenders, suppliers and employees are paid before shareholders. In most bankruptcies, shareholders get little or nothing.

Market capitalisation: the real size of a company

Market capitalisation (market cap) is the share price multiplied by the number of shares outstanding. It is what the whole company is worth at today's price.

The share price on its own says nothing about whether a company is big, small, cheap or expensive. A $40 stock can be a much larger company than a $900 stock if it has more shares. To compare value, you need ratios such as the price-to-earnings ratio, which you will meet in P/E ratio and valuation ratios.

Common and preferred shares

Most shares traded every day are common shares. There are also preferred shares, which usually pay a fixed dividend, rank ahead of common shares in a bankruptcy and normally have no vote. They behave partly like a bond. When people say "stocks", they almost always mean common shares, and so does this course.

Why companies go public

A company "goes public" when it first sells shares to outside investors and lists them on an exchange. The first sale is the initial public offering (IPO). Companies do this for several reasons:

• To raise money for factories, research, hiring or paying down debt, without borrowing.
• To give early owners a way to sell. Founders, employees and early investors can turn their shares into cash.
• To use shares as a currency. A listed company can pay for acquisitions or reward staff with shares that have a visible market price.
• For visibility and credibility with customers, lenders and partners.

Listing has costs too. A US-listed company must publish audited annual reports and quarterly reports with the Securities and Exchange Commission (SEC), disclose important events quickly, and live with daily public scrutiny of its share price. Some very large companies choose to stay private for these reasons.

Primary market and secondary market

The IPO happens in the primary market: the company sells new shares and receives the money. After that, almost all trading happens in the secondary market, where investors buy from and sell to each other. When you buy 10 shares of a famous company through your broker, the seller is another investor, not the company.

A company can sell more shares later in a follow-on offering. That raises cash but spreads profits across more shares, which is called dilution. Companies can also do the opposite and buy back their own shares, which you will study in dividends and buybacks.

What moves a share price

In the short run, a share price moves because buyers and sellers disagree and someone has to give way. In the long run, prices tend to follow what investors expect the company to earn in future. Three ideas explain most moves:

1. Expectations, not results, move prices. A company can report record profit and still fall if investors expected more.
2. Interest rates matter. Higher rates make future profits worth less today, which usually hurts fast-growing companies most.
3. Mood matters in the short run. Fear and greed can push prices far from any sensible value for months.

How stock investors make (or lose) money

Your total return is the change in price plus any dividends received, minus fees and taxes.

Stocks compared with other places to keep money

	Stocks	Bonds	Bank deposit
What you hold	Ownership in a company	A loan to a company or government	A deposit with a bank
Income	Dividends, if paid	Fixed interest	Interest
Upside	Unlimited in theory	Limited to interest and price changes	Limited to interest
Typical risk	Highest of the three	Medium	Lowest, but inflation can erode it

Over long periods, stocks have historically rewarded investors for that extra risk, but with deep and sometimes long falls along the way, and there is no guarantee the past repeats.

Next, you will see where these shares actually trade and when: how the stock market works.