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DEFINITION:
A share is a unit of ownership in a company – if you own a share, that makes you a shareholder, which means you may be entitled to dividends if the company is successful, and you have a vote in some corporate decisions.
Understanding a stock
Stocks are an important part of the global economy, allowing companies to raise money to operate their businesses by selling shares (or ownership interests) to the public. Stocks can be bought or sold through an exchange such as the New York Stock Exchange (NYSE) or Nasdaq. In limited cases, shares may also be sold privately. Specific Securities Exchange Commission (SEC) regulations govern how companies can manage or distribute their stock. Shares can be either common stock, which gives shareholders voting rights on certain corporate decisions, or preferred stock, which does not give shareholders voting rights but often guarantees them a fixed dividend payment in perpetuity.
EXAMPLE
If a company has 100 shares outstanding and you own 1 share, you own 1% of that company. The value of your shares is approximately equal to that percentage (1%) of the company’s market capitalization, or the value of all outstanding shares.
Takeaway
A stock is like a piece of ownership in a cupcake business…
Imagine you want to open a cupcake business, but you only have $1,000 to get started. To buy the necessary materials (e.g., flour, frosting, cupcake tins), you could raise money from friends and family. Let’s say that four of your friends contribute $1,000 each, so you’ve a total of $5,000 to get the business going. In return for their investment, you could agree to give each of them 20% of the business and its profits. It’s kind of like stocks, but on a much larger scale.