What is a Stock?

What Exactly Is a Stock?

A stock (also called a share) is a small piece of ownership in a company.

Think of a pizza cut into 100 slices. Buy one slice and you own 1% of the pizza.

Companies work the same way, only with millions of slices. When a company goes public, it splits its ownership into shares that anyone can buy.

Buy even one share and you're a part-owner. Your slice of a giant like Tesco would be tiny, but it's real. When Tesco makes a profit, a sliver of that success belongs to you.

Why Would a Company Sell Pieces of Itself?

Because companies need money to grow.

Say your school brownie stall is a hit, and you need £400 of equipment to grow. You could:

• •Borrow it, pay back £440 with interest, and keep the whole business.
• •Sell a quarter of the business for £400. You never pay it back, but the buyer owns that quarter for good.

If the business grows to be worth £4,000, their quarter is worth £1,000.

Real companies do the same. JD Sports began as one shop in Bury in 1981 and started selling shares to the public in 1996. Today it has thousands of shops worldwide. Lesson 45 explains why companies sell shares.

Why Share Prices Move

You saw in Lesson 24 that prices follow buyers and sellers. When more people want to buy than sell, the price rises - often after good news, like bigger profits than expected. When more want to sell, it falls.

Day to day, prices can jump a few per cent for no clear reason. These ups and downs are called volatility, and they're normal.

Here's the key: over days and weeks, moves are mostly random. Over years, a share's price has tended to follow how well the company does (Lesson 44 goes deeper).

Two Ways Shares Can Pay You

1. The price goes up. Buy a share for £10, the company grows, and the price rises to £15. That's £5 more than you paid.

2. The company pays you cash. Many profitable companies share some of their profits with their owners. These payments are called dividends.

The good news for a young investor: you have decades ahead of you. Leave your shares alone, and both can keep adding up, year after year. That's compound growth (Lesson 15), and time is what powers it.

Shares or Savings?

A savings account keeps your money very safe, but it often only roughly keeps up with prices. It suits money you'll need soon.

Shares can fall as well as rise, and a single company can even go bust. But taken all together, over the long run, shares have grown by about 7% a year more than prices rise - history, not a promise. They suit money you won't need for at least five years (Lesson 22).

Over 40 years, that gap is huge. £100 growing that way could become about £1,500. If savings roughly keep up with prices, it would still buy about what £100 buys today.