What is a Stock?

If you have ever heard someone mention buying shares of Apple or watching the S&P 500, they were talking about stocks. Stocks are the building blocks of most retirement accounts, index funds, and investment portfolios, and understanding them is the first step toward putting your money to work.

What is a Stock?

A stock is a small slice of ownership in a company. When you buy one share of a business, you become a part owner, called a shareholder, with a claim on a piece of that company's assets and earnings. If the company grows more valuable, your share generally grows more valuable too.

Companies sell stock to raise money for things like hiring, research, or expansion, and investors buy it hoping the price will rise or that the company will pay them a portion of profits called dividends.

That is the entire core of the idea: you give a company capital, and in exchange you own a piece of whatever it becomes.

How Stocks Work

Companies divide their ownership into shares, sometimes billions of them. Apple, for example, has roughly 15 billion shares outstanding, so one share represents a tiny fraction of the whole company.

Most stock trading happens on exchanges like the New York Stock Exchange and the Nasdaq, where buyers and sellers set prices in real time.

A share's price moves constantly based on supply, demand, company performance, and expectations about the future.

The Securities and Exchange Commission explains the basics of how these markets operate at Investor.gov, its official investor education site.

How You Make or Lose Money

There are two ways a stock can pay you.

The first is price appreciation: you buy a share at $50, the company does well, and you sell it later at $80 for a $30 gain per share.

The second is dividends, which are cash payments some companies make to shareholders, often quarterly.

The risk runs in the other direction too. If the company struggles, your $50 share could fall to $30, or in a bankruptcy, all the way to zero.

Historically, the broad U.S. stock market has returned about 10 percent per year on average over long periods, but individual years have swung from gains above 30 percent to losses near 40 percent.

Common Stock vs. Preferred Stock

Most investors own common stock, which usually comes with voting rights on matters like electing the company's board of directors.

Common shareholders are last in line if a company is liquidated, behind lenders and bondholders.

Preferred stock typically pays a fixed dividend and gets priority over common stock for payouts, but it usually carries no voting rights and less upside if the company's value soars.

For most beginners, common stock, or funds that hold baskets of common stocks, is the standard starting point.

What a Stock Is Not

A stock is not a savings product, and it carries no guarantee.

Unlike a bank deposit, which is insured up to $250,000 per depositor, per bank, by the FDIC, money invested in stocks can lose value with no government backstop on your losses.

A stock is also not a loan to a company. That is a bond, which pays interest and returns your principal at maturity.

Stocks offer no promised payments at all, which is exactly why they offer higher potential returns: you are taking on real ownership risk.

How to Buy Your First Stock

You buy stocks through a brokerage account, which works like a bank account built for investing.

Opening one online typically takes 10 to 15 minutes, and most major brokerages now charge zero commission on U.S. stock trades.

Once your account is funded, you place an order by entering the company's ticker symbol, such as AAPL for Apple, and the amount you want to buy.

If you are not sure where to start, SoFi Invest lets you open a commission-free account and browse stocks before you commit any money.

Many brokerages also offer fractional shares, which let you buy a portion of a single share for as little as $1 or $5.

That means you do not need $200 or more to own a piece of a major company, and you can start building a diversified portfolio with whatever amount fits your budget this month.