A stock represents a share of equity ownership in a company.
Stocks serve as investment tools that allow individuals and other legal entities to purchase fractions of ownership in a corporation. When businesses choose to legally structure as corporations, they become obligated to act in the best interests of their stockholders (also commonly referred to as shareholders), as stockholders represent the owners of a corporation.
Stocks vary in terms of their strength. Practically speaking, this means that the strength of an ownership share is defined by how many stocks (both privately and publicly held) are available at any given time. If a company has issued 100 shares of stock and you own two shares, you effectively own 1/50th of that company. The strength of your shares will dilute if the company later places 100 additional shares on the market. Your two shares will then represent a strength of 1/100th ownership in that company.
The value of these securities fluctuates over time due to any number of factors. If a company is doing well, its shares will generally be valued higher than they would if the company was struggling. Similarly, if the market is robust, shares will be valued higher than when the market takes a dive. It is therefore important to time the sale of stock according to what is happening both with the company that the shares are tied to and market conditions generally. Each share represents a fraction of a company’s assets and earnings. When sold, each share price represents a relative “piece” of the company’s assets and earnings “pie.”
Stocks in public companies are traded on an exchange. Exchanges track the sale of stocks in ways that inform investors about the supply and demand associated with each company’s performance on the exchange. This platform helps to keep stock performance transparent and this transparency then ultimately influences a stock’s price at any given moment. These investments are not guaranteed, so it is possible to lose part or all of one’s investment if the stock market is not “played” effectively.
Mutual funds, 401(K) plans, many pensions/retirement plans and other investments are impacted by stock held by the funds that govern these broader pools of investments. As a result, more Americans are impacted by the performance of stocks than might be gleaned at first glance.
Husband: “Because the company I invested in is doing so well, I decided to sell some stock because I have always wanted to own cows and sheep.”
Wife: (Blinks) “You know that stock and livestock are not the same thing, right? That when you sell stock, all you get is a financial return on your investment?”