What Are Stocks? – Understanding Shares in Plain Language

What is a stock?

A stock is a unit of ownership in a company. If you own a share of a business, you own a small part of its assets, earnings and future. When people talk about “the stock market”, they are talking about the combined value of many individual companies’ shares.

Publicly traded stocks are listed on stock exchanges. You can buy and sell them through a brokerage account or trading platform, much like you would trade other securities such as mutual funds or ETFs.

How companies issue shares

When a company wants to raise money from investors, it can issue shares. The most visible event is often an initial public offering (IPO), where a previously private company sells shares to public investors for the first time.

In an IPO:

• The company and its advisors decide how many shares to issue and at what price.
• Investors buy those shares, providing capital to the company.
• After the IPO, the shares begin trading on an exchange, and prices move based on supply and demand.

Existing public companies can also issue additional shares later to fund expansion, acquisitions or debt reduction. On the other side, they can buy back shares to reduce the number of shares outstanding.

How stock prices are set

Stock prices are not set by a single person or formula. They emerge from the continuous auction between buyers and sellers. At any moment:

• Buyers enter bids – the price they are willing to pay.
• Sellers enter offers – the price at which they are willing to sell.
• When a bid meets an offer, a trade occurs and the last traded price updates.

Over time, prices are influenced by many factors:

• Company earnings, growth prospects and competitive position.
• Interest rates and the broader economic environment.
• Investor sentiment and risk appetite.
• Industry trends and new technologies.

In the short term, prices can move sharply on news and emotion. Over longer periods, the company’s ability to generate profits and cash flow becomes more important.

Types and categories of stocks

It is common to group stocks into categories to help investors think about risk, style and diversification. Common labels include:

• Large‑cap, mid‑cap and small‑cap: based on the company’s total market value.
• Growth vs. value: high‑growth companies vs. those trading at lower valuations relative to fundamentals.
• Dividend‑paying stocks: companies that distribute a portion of their profits to shareholders on a regular basis.
• Defensive vs. cyclical: companies whose earnings are less or more sensitive to the economic cycle.

These labels are tools, not rules. A diversified stock portfolio often includes exposure to different sizes, sectors and styles, rather than betting heavily on a single category.

How investors make money from stocks

There are two main ways investors can earn returns from stock ownership:

• Capital gains: when the stock price rises above your purchase price and you sell at a profit.
• Dividends: periodic cash payments that some companies make to shareholders from their profits.

Many long‑term investors reinvest dividends by using them to buy more shares. Over time, this reinvestment can significantly boost the compounding effect of stock returns.

Key risks of stock investing

Stocks have historically provided higher long‑term returns than many other assets, but they also come with meaningful risks:

• Market risk: broad market declines can pull down even strong companies.
• Company‑specific risk: poor management decisions, competitive threats or financial issues can hurt a particular stock.
• Volatility: prices can swing sharply in response to news, sometimes overshooting in both directions.
• Behavioural risk: investors may panic and sell at a low point, or chase hot stocks after big moves.

Using broad stock funds or ETFs (see ETF Basics) is one way to reduce company‑specific risk, because you own many businesses at once.

Trading vs. investing

It is helpful to distinguish between investing in stocks and actively trading them.

Long‑term investors typically:

• Choose diversified funds or a selection of individual stocks.
• Hold them for years, focusing on business results rather than daily price moves.
• Rebalance periodically to maintain their target allocation.

Traders, including day traders, aim to profit from short‑term price fluctuations. They often use more frequent trades, leverage and technical analysis. Trading is a different skill set and carries different risks than long‑term investing.

On FTMarketWatch, pages like Day Trading, Options and Futures explore trading‑oriented strategies separately from this investing‑focused guide.

Stocks inside a broader portfolio

For many people, stocks form the growth engine of a portfolio. Over long horizons, a higher allocation to equities usually increases both expected return and expected volatility.

Stocks are typically combined with:

• Bonds for stability and income.
• Cash or cash equivalents for short‑term needs and emergencies.
• Diversified funds or ETFs to spread risk across many holdings.

Our Investing 101 page shows how stocks, bonds and other building blocks fit together into a simple asset‑allocation plan.

Mini case study: building stock exposure sensibly

Jordan is 28 and wants to start investing for the long term. They are excited about technology stocks, but also nervous about big swings.

Instead of buying a handful of individual names, Jordan decides to:

1. Use a broad domestic stock‑market ETF for core exposure.
2. Add a smaller allocation to an international stock ETF.
3. Hold a modest bond ETF allocation to reduce overall volatility.

Jordan still participates in the performance of many technology and growth companies, because they are included in the broad indices. But by using diversified funds rather than a short list of individual stocks, Jordan avoids concentrating too much risk in any single company.

Stocks – FAQs

Is it better to pick individual stocks or use funds?

For most investors, especially when starting out, diversified funds or ETFs are simpler and less risky than picking individual stocks. Stock picking can be rewarding but requires time, research and a tolerance for stock‑specific risk.

How many individual stocks would I need for diversification?

Academic research suggests that holding dozens of stocks across sectors is often required for meaningful diversification. This is one reason index funds and ETFs, which may hold hundreds of companies, are popular core holdings.

Can stocks go to zero?

Yes. If a company goes bankrupt or its equity is wiped out in a restructuring, common shareholders can lose their entire investment. Diversification is the main defence against the impact of any one stock failing.

What should I read next?

To see how stocks fit into a broader plan, visit Investing 101 and ETF Basics. For more on risk and portfolio balance, explore Bond Investing Basics and Retirement Investing Basics.