What a stock is and why its price moves

A stock is a piece of a business

A stock is a security representing an ownership stake in a company. If a company has 100 million shares and you hold 100 of them, you own one-millionth of it. That is a tiny stake, but a real one: you have a share in the company's profits, assets and future.

Hold on to this idea from the start: a stock is neither a lottery ticket nor just a number on a screen. Behind it are employees, factories, customers and a business that reports every quarter. Over the long run a stock's price follows how much money that business makes.

What a shareholder owns

• A share of the profits. The company can pay part of its profit as a dividend or reinvest it — either way it affects the value of your stake.
• Voting rights. Common shares usually vote on the board of directors and major decisions (for a small investor this is mostly a formal right).
• Limited liability. If the company goes bankrupt, you cannot lose more than you put in — its debts do not pass to you.
• A last-in-line claim. In bankruptcy, creditors are paid first and shareholders are often left with nothing. That is why stocks are riskier than debt.

Every stock trades under a short ticker: Apple is AAPL, Microsoft MSFT. A ticker is just a name; it tells you nothing about the company.

Where shares come from: the IPO

A company starts out private: its shares sit with the founders and early investors. When it needs a lot of money to expand, it lists on an exchange — an IPO (initial public offering).

Example. A company has 80M shares: 50M with the founders and 30M with early investors. At the IPO it issues 20M new shares at $25 each and raises $500M. The total share count is now 100M.

Look at the chart: the founders still hold their 50M shares, but their stake fell from 50 ÷ 80 = 62.5% to 50 ÷ 100 = 50%. Issuing new shares dilutes existing owners. The reverse is a buyback: the company buys its own shares, shrinking the count and raising the stake of every remaining share.

Primary and secondary markets

At the IPO the money goes to the company — that is the primary market. After that, shares change hands between investors — the secondary market. When you buy shares through a broker, your money goes to the investor who sold, not to the company. The share price still matters to the company: a higher price makes it easier to raise new capital and to pay employees in stock.

Market capitalisation — the size of the company

Market capitalisation = share price × shares outstanding. In the IPO example: 100M × $25 = $2.5bn. If the price rises to $30, the market cap becomes $3bn.

The most common beginner mistake is to confuse the share price with the size of the company. Compare two companies:

• A: price $500, 10M shares → market cap $5bn;
• B: price $20, 2bn shares → market cap $40bn.

B's share is 25 times "cheaper", yet the company is 8 times bigger. A single share's price says nothing about whether it is "expensive" or "cheap" — that is judged against earnings (see the Valuation ratios lesson).