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What are Stocks?

If you’re a newbie investor, you’re likely wondering, ‘What are stocks?’ We’re here to tackle that question in a way you can actually understand.

What are Stocks? (The Basic Definition)
A stock represents a piece of ownership, or a “share,” of a public corporation. The value of one share can range from under $1 to over $100,000. The book value of a share depends upon the total worth of a company, divided by the number of shares issued. At any given time, there are only a finite number of shares of a specific company available to the public. Price per share fluctuates due to supply and demand.

an infographic breaking down the definition of what a stock is

What are Dividends?
When the company performs well, it might reinvest profits to expand or share the profits with shareholders as dividends. Since dividends depend on earnings, stockholders have a stake in the company’s performance through voting rights.

Understanding IPOs
When shares of a company are purchased in an initial public offering (IPO,) the money supports the company in furthering its business ventures. After shares are purchased from an IPO, they are merely being exchanged between old and new shareholders with each sale.

What is Perceived Value?
When more people want to buy than sell, the value of the stock increases. This perceived value can be higher than the actual book value. When this happens, the stock is overvalued and may not be a good buy.

What Will Stocks Do in the Future?
When you’re considering buying a stock, you will want to look at the book value versus perceived value, the likelihood that the company will grow in the future and the current financial health of the corporation. Because no future prediction can guarantee a definitive outcome, it’s important to understand the company and industry well before making an investment.

[Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by the National Endowment for Financial Education.]

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