What are stocks: owning a piece of a business

The lesson in plain words

The same lesson as the slides above, written out in full.

1. A stock is a slice of a business

Welcome. Before we talk about prices or charts, let us start with the simplest idea in investing, which is what a stock really is. A stock is just a small piece of ownership in a real company, and when you hold one you become a part-owner of that business. Everything else we cover builds on this single idea.

• A stock is a unit of ownership in a real, working company.
• Buying one share makes you a part-owner, known as a shareholder.
• You share in the ups and the downs of the business.
• Many owners each hold a piece, and together they own the whole.
• This one idea is the foundation for everything that follows.

A quick note: This is financial education only, not financial advice. The numbers here are illustrative, and any decision about your own money is yours to make, ideally with the help of a qualified professional.

2. What you actually own

When you own a share you are not holding a lottery ticket, you are holding a genuine stake in a company. That stake usually comes with the right to vote on big decisions, the right to your share of profits the company pays out, and a claim on what the business owns. The more shares you hold, the larger your say and the larger your slice.

• As a part-owner you hold genuine rights, not just a price on a screen.
• You usually get a vote on big company decisions.
• You are entitled to your share of any profits the company pays out.
• You hold a claim on the company assets, which ranks behind its lenders.
• Your rights scale with how many shares you hold.

3. Two ways an owner is rewarded

There are two main ways that being an owner can reward you. The first is price appreciation, where the share becomes worth more than you paid for it. The second is dividends, which is cash a company may choose to pay its owners out of profits. Neither is guaranteed, and both depend on the business doing well over time.

• Owners can gain in two main ways, and neither one is promised.
• Price appreciation is when the share is worth more than you paid.
• Dividends are cash a company may choose to pay owners from profits.
• Some companies pay dividends, and many reinvest instead and pay none.
• Both rewards depend on the business doing well over time.

4. With ownership comes real risk

Here is the honest other side. Because you truly own a piece of the business, you also carry real risk, and the value of your shares can fall as well as rise. In the worst case a company can fail and a share can become worthless, so nothing here is guaranteed. That is why we focus on carefully owning good businesses rather than betting against them.

• Ownership means you share the downside as well as the upside.
• A share price can fall just as easily as it can rise.
• In the worst case a company can fail and a share can reach zero.
• Nothing about the price or the dividends is guaranteed.
• We focus on owning good businesses, not betting against them.