Stock (Equity)
What is Stock (Equity)?
A stock is a share of ownership in a company, giving the holder a claim on part of its assets and profits.
Companies issue stock to raise financial capital. Shareholders may earn returns through dividends and rising share prices. Stocks are riskier than bonds but historically offer higher average returns.
Stock (Equity): a worked example
Suppose Harbor Bikes issues 200,000 shares and you buy 50 of them at $20, spending 50 × $20 = $1,000. Your stake is 50 ÷ 200,000 = 0.025% of the company, and that is also the size of your claim on its profits. The company has a good year and pays a $0.60 dividend per share, so you receive 50 × $0.60 = $30. Buyers bid the share price up to $23, making your 50 shares worth $1,150, a gain of $150. Your one-year return is ($150 + $30) ÷ $1,000 = 18%, and none of it was promised in advance.
The mistake students make with stock (equity)
Students assume that whenever a stock is bought, the money goes to the company, so a rising share price must mean the firm has more cash to spend. Only the original issue raises financial capital for the firm; after that, shares change hands between investors and the company receives nothing. The mix-up is tempting because stock gets introduced as a way firms raise money, which is true of the issue and not of the daily trading that follows it.
Stock (Equity) questions
What is the difference between stocks and bonds?
Stocks and bonds differ in what the issuer owes you. A stock makes you a part owner with no promised payment, so your return depends on profits and on what other buyers will pay later. A bond makes you a lender, entitled to fixed interest and repayment of the principal. If the firm fails, bondholders get paid before shareholders, which is the reason shareholders carry more risk.
What is the difference between a dividend and a capital gain?
A dividend is cash a company pays out of profit to shareholders, quoted per share and decided by the board rather than owed automatically. A capital gain is the rise in the share's price, and you only collect it by selling. A company can pay no dividend for years and still reward shareholders if it reinvests its profits and the share price climbs as a result.
Why do stock prices go up and down?
Stock prices move because a share is a claim on future profits that nobody can observe yet, so the price reflects what buyers currently expect. News about sales, costs, or competitors changes those expectations, and the price adjusts as soon as buyers and sellers act on it. Higher interest rates also make future profits worth less today, which pushes prices down even when the company itself has not changed.
Related terms
Common comparisons
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