Stock Market Made Simple: What is a Stock?

Welcome to the first installment of our new introduction to trading blog series. In this series, we will be building a foundational understanding of the stock market from the ground up. So, if you are curious about the stock market and how it works, and if you want to learn the basic principles of how to trade, then you are in the right place.

How is Stock Created?

The short of it is, all stocks are created by the company, which originally offered them for purchase. A company usually issues stocks for two main reasons. The first reason is to raise capital, which they can use to increase the company’s growth and reach thus increasing the company’s profits. This increase in growth can take the shape of hiring more employees in sales and support teams to boost the company’s current model of business. The second reason is to fund new projects which will expand the company’s reach into new areas of business with the hope of financial returns on their capital investment. Both reasons provide the opportunity for you and me to purchase a stake in the company’s future by owning stock of the company in question.

The Definition of Stock

Okay, a company releases or offers stock for purchase, but what exactly is a share of stock? Simply put, stock is a form of financial security which grants the owner of the stock a share of the company from which the stock is issued. For example, if you purchased ten shares of Apple stock, you would be considered a part-owner of the Apple corporation. Granted, only owning ten shares is a small drop in the ocean of available Apple stock, but you would still be a shareholder which grants you certain rights and benefits which come with your ownership.

The Benefits of Stock Ownership

When you own stock in a corporation, ownership provides you three main benefits. It gives you the right to attend and vote in shareholder meetings. It gives you the right to collect dividends based off the amount of stock you own. It should be noted; the company will distribute dividends based off earnings, which means they are not guaranteed as dividends are tied to a business's growth and profits. Finally, it gives you the right to sell your shares to someone else.

Why Sell or Trade Your Shares?

This final question brings us to the start of our stock trading journey, why would you sell the shares of stock which you own to someone else? A share of a company’s stock is considered a financial security, kind of like money. Just as a one-dollar bill has an intrinsic value of one dollar or hundred pennies, a share of stock has monetary value attached to it as well. What is different is a one-dollar bill will always be worth one hundred pennies, while the monetary worth of a share of stock fluctuates from day to day and even minute to minute. Thus, when the worth or price of a stock goes up above what you purchased it for, you can sell your shares of stock and make a profit on the transaction. Yes, you can profit off the growth and success of a company by purchasing their stock and selling it when it rises in value.

That my friend is one of the foundational ideas behind buying and selling stocks on the stock market; the ability to take a share of a company stock and trade it on the open market for a profit. Join us next week as we learn more about the process of trading stocks.