What Is a Stock? How Stocks and the Stock Market Work
A stock is a share of ownership in a company. When you buy a stock, you own a small piece of that business. If the company grows and becomes more valuable, the price of its stock tends to rise. If it struggles, the price tends to fall.
Stocks are usually the first market new traders learn, because they're the easiest to understand. This guide explains how they work.
Why do companies issue stock?
Companies sell shares to raise money without taking on debt. The first time a company sells shares to the public is called an initial public offering (IPO). After that, its shares trade between investors and traders on a stock exchange, such as the New York Stock Exchange or Nasdaq in the US.
When you buy a stock on an exchange, you're usually buying it from another investor, not from the company itself.
What do you get when you own a stock?
Depending on the company and the type of share, a shareholder may receive:
- Price appreciation: the stock may rise in value, so you can sell it for more than you paid.
- Dividends: some companies share part of their profits with shareholders as regular cash payments.
- Voting rights: common shareholders can usually vote on certain company decisions.
Why do stock prices go up and down?
A stock's price is set by supply and demand: what buyers are willing to pay and what sellers are willing to accept. Many things shift that balance:
- Company results: earnings, revenue and growth compared to expectations.
- News and events: product launches, leadership changes, lawsuits or regulation.
- The wider economy: interest rates, inflation and economic growth.
- Market sentiment: how optimistic or fearful investors feel overall.
In the short term, prices can move for reasons that have little to do with the company's real value. That short-term movement is what traders try to profit from, and it's also why stock trading can be emotionally demanding.
Key stock market terms
- Ticker symbol: the short code used to identify a stock, such as AAPL for Apple.
- Market capitalisation: the total value of a company's shares (share price × number of shares). Companies are often grouped as large-cap, mid-cap or small-cap.
- Index: a group of stocks tracked together to measure part of the market, such as the S&P 500.
- Bull market / bear market: a period of generally rising (bull) or falling (bear) prices.
- Liquidity: how easily a stock can be bought or sold without moving its price much.
How does stock trading work?
- Open an account with a broker that gives you access to the exchanges you want to trade.
- Choose a stock and decide whether you expect its price to rise or fall.
- Place an order: a market order to trade now, or a limit order to trade at a specific price.
- Manage the position: set a stop-loss, and know in advance where you'll take profits or cut losses.
- Close the position by selling (or buying back, if you were short).
Investing in stocks vs trading stocks
Investors buy stocks to hold for years, focusing on the business's long-term growth. Traders buy and sell more often, focusing on shorter-term price moves. Traders face more decisions per week, and every one of those decisions is a chance for fear or impatience to take over. That's why a clear plan, and a record of how you follow it, matters so much.
Common mistakes new stock traders make
- Buying a stock because it's already up a lot and they fear missing out.
- Holding a losing position too long, hoping it will "come back".
- Selling winning positions too early to lock in a small gain.
- Trading without a stop-loss or a daily loss limit.
Most of these aren't knowledge problems. They're psychology problems. Read Trading Psychology: Why It Matters More Than Your Strategy to understand why.
Key takeaways
- A stock is a share of ownership in a company.
- Stock prices move with supply and demand, driven by results, news, the economy and sentiment.
- Traders focus on short-term price moves; investors focus on long-term value.
- The most common beginner mistakes are emotional, not technical.
Frequently asked questions
Can I lose more than I invest in a stock?
If you simply buy a stock, the most you can lose is the amount you paid. Short selling or using leverage (margin) can lead to losses larger than your initial investment.
What's the difference between a stock and a share?
The terms are often used interchangeably. "Stock" usually refers to ownership in companies in general, while "shares" are the individual units of that ownership.
How do I pick a stock to trade?
Start with liquid, well-known stocks, learn how they move, and focus on a consistent process rather than tips or hype.
This article is for educational purposes only and isn't financial advice. Trading involves risk, including the loss of your capital.