What Is a Stock and How Does It Work?

If you’ve ever wondered what it really means to “own stock” in a company, you’re not alone. Stocks are one of the most common ways people invest and build wealth — but understanding how they work is key before you jump in.

In simple terms, buying a stock means buying a small piece of a company. These small pieces are called shares. When you own shares, you’re essentially a shareholder, which gives you the right to a portion of the company’s profits and assets, depending on how many shares you hold.

Stocks are primarily traded on public stock exchanges such as the New York Stock Exchange (NYSE) and NASDAQ, where prices are determined by supply and demand. These exchanges are heavily regulated by government agencies like the U.S. Securities and Exchange Commission (SEC) to protect investors and maintain transparency.

Why Do Companies Issue Stock?

Companies issue stock as a way to raise money to operate and expand their business. This process is called equity financing.

Instead of taking out loans or relying solely on profits, companies sell ownership shares to investors. When you purchase stock, you’re helping fund the company’s future in exchange for potential profits.

For example:

• A tech startup may issue stock to fund product development or marketing.
• An established company might issue shares to expand into new markets.

When you buy these shares, you become part of the company’s success story — sharing in both its profits and potential losses.

💡 Example:
If a company has 1,000 shares and you buy 100, you own 10% of that company. That means you’re entitled to 10% of its distributed profits.

Also Read: What Are the Key Takeaways from the Latest Fed Meeting?

Do Shareholders Actually Own the Company?

Not exactly. It’s a common misconception that owning stock makes you a direct owner of the company’s assets.

Legally, a corporation is a separate entity — it can own property, enter contracts, pay taxes, and even be sued, just like a person. So, while you’re a shareholder, you don’t own the company’s physical assets like its office buildings or machinery.

This setup offers important legal protection:

• If the company goes bankrupt, your personal assets are safe. You can only lose the money you invested in the stock.
• Similarly, if a large shareholder goes bankrupt, they can’t use the company’s assets to cover their debts.

This structure is called limited liability, and it’s one of the main reasons investors feel comfortable buying stocks.

📚 Further reading: U.S. Securities and Exchange Commission: How Stock Markets Work

What Do Shareholders Really Own?

When you buy shares, you own a claim to the company’s profits and voting rights, not the company itself.

This concept is known as the separation of ownership and control. You might own 33% of the company’s shares, but that doesn’t mean you own one-third of its office or assets — it means you own one-third of the voting and profit rights tied to those shares.

As a shareholder, you typically have three main rights:

1. Voting rights – You can vote at shareholder meetings on key company decisions.
2. Dividend rights – You may receive a portion of profits when dividends are distributed.
3. Transfer rights – You can sell your shares at any time.

If you own a large number of shares, your influence grows. Major shareholders can help choose the board of directors, which makes strategic decisions and appoints executives like the CEO.

When you buy stocks, you become a part-owner of the company. When you buy bonds, you’re lending the company money. Bondholders get paid back with interest, and they have priority over shareholders if the company goes bankrupt. This means bonds are usually safer than stocks, but they may offer lower returns.

Common vs. Preferred Stock

There are two primary types of stock: common stock and preferred stock.

Feature	Common Stock	Preferred Stock
Voting Rights	Usually included	Usually not included
Dividend Priority	Paid after preferred shareholders	Paid before common shareholders
Risk Level	Higher risk, higher potential returns	Lower risk, steady income
Bankruptcy Priority	Last in line for claims	Paid before common shareholders

Example:

• If a company declares bankruptcy, preferred shareholders get paid before common shareholders.
• However, common shareholders might enjoy greater gains if the company’s stock price soars.

Sometimes companies issue new shares to raise more money, which can dilute your ownership percentage. Conversely, if a company buys back shares, it can increase the value of your existing ones.

How Are Stocks Different from Bonds?

Both stocks and bonds are ways for companies to raise capital — but they represent different financial relationships.

Factor	Stocks	Bonds
Type of Investment	Ownership	Debt
Investor Role	Part-owner (shareholder)	Lender (creditor)
Returns	Dividends + capital gains	Fixed interest payments
Risk Level	Higher (price can fluctuate)	Lower (fixed returns)
Bankruptcy Priority	Paid last	Paid first

When you buy a stock, you become a partial owner of the company.
When you buy a bond, you’re lending money to the company in exchange for regular interest payments.

Because bondholders get paid before shareholders if a company fails, bonds are generally safer, but they offer lower returns compared to stocks.

📈 For more on this topic, visit: Forbes: Stocks vs. Bonds – Which Should You Invest In?

Also Read: Is Dollar-Cost Averaging Still a Smart Strategy in 2025?

Conclusion

Understanding what a stock is and how it works is the first step to becoming a confident investor. Buying stocks means owning a stake in a company’s potential — and with that comes both opportunity and risk.

Whether you’re investing for retirement, long-term wealth, or short-term growth, it’s essential to diversify your portfolio, stay informed, and invest with a clear strategy.

Want to take the next step? Start by researching a few companies you believe in and watch how their stock prices move over time. Knowledge is your most valuable investment.

FAQs About Stocks