What is a Stock? (Definition)
A stock is a security that represents a fractional ownership in a company. When you purchase a stock, you are buying a small piece of the company (also known as a share).
Investors purchase stock in companies that they believe will go up in value. If the company’s valuation increases then the stock can be sold for a profit.
How Stocks Work
Publicly traded Companies issue shares of their stock either through public stock market exchanges such as the NASDAQ or NYSE.
Privately owned companies can issue shares of stock through seed funding or an equity capital raising round.
When companies issue stock, management can use the proceeds of the stock sale to fund operations, pay off debt, expand production, or raise cash during tough economic periods.
For investors, investing in stocks is an easy way to grow your savings and fight against inflation that eats away at your purchasing power. When you become a shareholder, you make money when stocks rise in value and can earn dividends to increase your passive income.
Most publicly traded companies host annual shareholder meetings where you can vote on important decisions within the company.
Stocks trade during normal business hours Monday through Friday on stock exchanges around the world.
For example, the NASDAQ and NYSE are open Monday through Friday from 9:30am to 4pm EST in America.
During normal market hours, stock prices can fluctuate widely depending on several factors including:
- Press Releases
- Federal Reserve announcements
- CPI inflation data
- New product offerings
- New partnerships or finalized contracts
- Share offerings
There are literally dozens of factors that affect stock prices in the short run however most stocks go up or down over the long run based on earnings.
Different Types of Stocks
Most publicly traded companies issue common shares to the general public under one ticker symbol.
Sometimes companies will issue different classes of shares that have a different set of voting rights.
For example, Alphabet Inc has two different stock classes: Alphabet Class A shares (GOOGL) and Alphabet Class D Shares (GOOG).
Class A shares have voting rights while Class D shares do not have any voting rights.