What Are Stocks? A Beginner’s Guide to Shares and the Stock Market

Q: Are stocks safe?

Stocks are not safe in the sense of guaranteed returns or stable prices. They can fluctuate significantly and may lose value. Over long periods, diversified stock portfolios have historically provided higher returns than many other assets, but with more short-term volatility.

Stocks (also called shares or equities) represent partial ownership in a company. When you buy stock, you are buying a small slice of that business and its future profits and losses.

Key takeaways:

Stocks represent ownership in a company, not a guaranteed return.
Investors can make money from price gains and, in some cases, dividends.
Stock prices move based on company results, expectations and overall market sentiment.
Most people own stocks through diversified funds, not just individual picks.

This guide explains what stocks are in plain language: why companies issue them, how shares are traded, how returns are generated, the main risks and how stocks fit into a broader investing plan alongside bonds and mutual funds. For a wider overview, see Investing 101.

What exactly is a stock?

A stock is a claim on part of a company’s assets and earnings. Companies are divided into equal units called shares. If a company has 10 million shares outstanding and you own 1,000 of them, you own a small fraction of that business.

As a shareholder you typically get:

A share of potential profits (often paid as dividends or reinvested by the company).
The right to vote on certain company matters (for common stock).
The chance to benefit if the market values the company more highly in the future.

Stocks are not guaranteed. Their value goes up and down based on how the business performs and how investors feel about its future.

Why do companies issue stock?

Companies raise money in several ways: using their own profits, borrowing (issuing bonds or taking loans) or selling ownership stakes. Issuing stock allows a company to:

Raise capital for growth projects, acquisitions or paying down debt.
Spread risk among many investors instead of just a few founders or owners.
Give employees stock-based compensation to align incentives.

When a company first sells shares to the public through an initial public offering (IPO), those shares are bought by investors. Later, those same shares trade between investors on stock exchanges without the company being directly involved.

How stocks trade on the market

After stocks are issued, they trade on stock exchanges such as major national markets. Most individual investors access the market through:

Online brokerage accounts.
Workplace retirement plans that include stock or equity funds.
Financial advisers or managed accounts.

Stock prices are determined by supply and demand. At any moment, the bid price is what buyers are willing to pay and the ask price is what sellers are willing to accept. The difference between them is the spread.

For practical tips on choosing a platform, see Stock Trading Sites. For more active trading behaviour, see our guide to day trading basics.

Common stock vs. preferred stock

Most individual investors deal with common stock, but some companies also issue preferred stock.

Common stock: typical shares that come with voting rights and potential for unlimited upside, but no guaranteed dividends. Common shareholders are last in line if a company is liquidated.
Preferred stock: usually pays a fixed dividend and has higher priority than common stock in receiving dividends and assets if the company is wound up. Preferred shares often have limited or no voting rights and behave somewhat like a blend of stocks and bonds.

How investors make money from stocks

Investors can potentially earn returns from stocks in two main ways:

Capital gains: buying shares at one price and selling them later at a higher price (if the market value rises).
Dividends: periodic cash payments some companies make to shareholders from their profits.

Some companies reinvest profits instead of paying dividends, aiming to grow the business and increase the share price over time. Others, especially mature businesses, may return a larger portion of profits to shareholders as dividends.

Reinvesting dividends

Many investors choose to reinvest dividends automatically by buying more shares. Over long periods, reinvested dividends can be a major component of total stock market returns, thanks to compounding.

Why stock prices move

Stock prices respond to a mix of:

Company earnings and revenue growth.
Expectations about future profits and competitive position.
Interest rates and overall economic conditions.
Market sentiment, news and investor risk appetite.

Even strong companies see their stock prices fluctuate. Markets sometimes overreact in both directions. Short-term price moves can be noisy; long-term trends tend to follow business results more closely.

Market capitalization and types of stocks

Stocks are often grouped by their market capitalization (market cap), which is the total value of all a company’s shares (share price × shares outstanding). Broad categories include:

Large-cap: big, established companies.
Mid-cap: medium-sized companies with growth potential but more risk than large caps.
Small-cap: smaller, often faster-growing companies with higher volatility.

Stocks can also be classified by style and sector, such as:

Growth vs. value: fast-growing companies vs. companies perceived as undervalued.
Sectors: technology, healthcare, financials, energy and others.

Owning stocks across different sizes, styles and sectors is one way to diversify.

Valuation basics: what is a stock “worth”?

There is no single correct answer to what a stock is “worth,” but investors use valuation tools to compare price with fundamentals. Common examples include:

Price-to-earnings (P/E) ratio: share price divided by earnings per share.
Price-to-book (P/B) ratio: share price compared to net asset value.
Dividend yield: annual dividends per share divided by share price.

These metrics do not guarantee future performance, but they provide a framework for thinking about how expensive or cheap a stock might be relative to its earnings, assets or cash flows.

Owning stocks directly vs. through funds

You can own stocks in two main ways:

Individual stocks: buying specific companies through a broker. This offers control and the possibility of outperforming the market, but also requires more research and carries higher company-specific risk.
Funds and ETFs: buying mutual funds or exchange-traded funds that hold many stocks. This provides instant diversification and professional management or rules-based indexing. See Mutual Funds Basics.

Many long-term investors use diversified funds as core holdings, sometimes adding a smaller “satellite” portion of individual stocks they believe in.

Stocks in a broader investing plan

Stocks are typically the main growth engine in a long-term portfolio. They are often paired with:

Bonds: for stability and income. See bonds guide.
Cash: for safety and short-term spending needs.
Other assets: such as real estate or diversified funds, depending on your goals.

The mix of stocks and bonds is called your asset allocation. Younger investors with long horizons may hold more stocks. Those closer to retirement may increase bond exposure to reduce volatility, as discussed in Retirement Investing Basics.

Risks of investing in stocks

Stocks offer higher long-term return potential than many other assets, but they also carry important risks:

Market risk: broad declines affecting many stocks at once.
Company-specific risk: poor performance or bad news affecting a single stock.
Volatility: large short-term price swings that can be emotionally challenging.
Permanent loss: if a company fails, its stock can lose most or all of its value.

Diversification and a long-term perspective help manage some of these risks, but they cannot eliminate them completely.

Common stock investing mistakes

New stock investors often run into similar pitfalls:

Putting too much money into one company or sector.
Chasing recent “hot” stocks without understanding the business.
Reacting emotionally to short-term market swings.
Overtrading or trying to time every move, similar to aggressive day trading.
Ignoring fees and taxes when buying and selling frequently.

Having a clear plan, diversified holdings and a realistic time horizon can make it easier to avoid these mistakes.

Getting started with stocks: a simple checklist

If you are new to stocks and want to begin carefully:

Clarify your goals: Are you investing for retirement, a long-term objective, or speculating short-term? Your answer shapes your approach.
Choose an account: Understand your local retirement accounts and regular investing accounts. See retirement basics for context.
Start with diversification: Consider broad stock funds or ETFs as a foundation before concentrating in single stocks.
Decide on an allocation: Choose a mix of stocks and bonds that matches your risk tolerance. See Investing 101.
Automate contributions: Regular investing helps smooth out market ups and downs over time.
Review periodically: Check in once or twice a year, rebalance if needed and avoid overreacting to short-term news.

This page is for general education only. It is not personal financial advice. Your own decisions should reflect your financial situation, goals, time horizon and comfort with risk.

What Are Stocks? – FAQ

Are stocks safe?

Stocks are not “safe” in the sense of guaranteed returns or stable prices. They can fluctuate significantly and may lose value. Over long periods, diversified stock portfolios have historically provided higher returns than many other assets, but with more short-term volatility.

Do I need a lot of money to start investing in stocks?

Not usually. Many brokers and investing platforms allow small starting amounts and fractional share investing. The key is to begin with an amount you can afford and build the habit over time, rather than waiting for a large lump sum.

Is it better to pick individual stocks or use funds?

For many beginners, diversified funds and ETFs are simpler and less risky than focusing heavily on individual stock picks. If you do choose individual stocks, some people limit them to a smaller portion of an overall portfolio built mainly from broad funds.

How long should I plan to hold stocks?

Stocks are generally best suited to long-term goals measured in years, not days or weeks. A longer time horizon makes it easier to ride out the normal ups and downs of the market. Short-term trading in stocks is much closer to speculation and is covered in our day trading guide.

For a broader foundation, see Investing 101 and Retirement Investing Basics. To learn about related building blocks, read mutual funds and bonds. For more active and higher-risk strategies, see our guides to day trading, forex, options and futures. For quick definitions of stock market terms, visit our Dictionary Index.