What Is a Stock?

Owning a Piece of a Business

When a company needs capital to grow — to build factories, hire engineers, or expand into new markets — it can raise money in two ways: borrow it (debt) or sell ownership stakes (equity). A stock (also called a share or equity) represents a fractional ownership interest in a corporation.

If Apple has 15.3 billion shares outstanding and you own 100 shares, you own approximately 0.0000007% of Apple — a tiny slice, but a real one. As a shareholder, you own a proportional claim on Apple's assets and earnings. If Apple earns $100 billion in profit, your 100 shares entitle you to a proportional share of those earnings (either paid out as dividends, or reinvested in the company on your behalf).

IPOs: Going Public

Companies start as private — owned by founders, employees, and private investors. When they decide to sell shares to the general public for the first time, they conduct an Initial Public Offering (IPO).

In an IPO, the company works with investment banks (underwriters) who help set the initial share price, market the offering to institutional investors, and list the shares on an exchange (NYSE or NASDAQ). The company receives cash from the primary sale; after that, investors trade shares among themselves in the secondary market — this is what you see on stock market apps.

Famous IPOs: Google (2004, $85/share), Facebook (2012, $38/share), Airbnb (2020, $68/share). Each was a moment when private wealth became publicly tradeable.

Common vs. Preferred Stock

Not all stock is equal. Most individual investors buy common stock, which gives:

• Voting rights: typically one vote per share on major company decisions (electing the board, approving mergers)
• Dividends (if declared): periodic cash payments from profits, at the board's discretion
• Residual claim: if the company is liquidated, common shareholders receive what's left after all creditors and preferred holders are paid — often nothing in bankruptcies

Preferred stock sits between bonds and common stock. Preferred holders receive a fixed dividend before common holders get anything, and have priority in liquidation. But they typically have no voting rights and limited upside if the company succeeds.

How Stock Prices Are Set

Stock prices are set by supply and demand among buyers and sellers on exchanges. There's no formula — the price is wherever a willing buyer and willing seller agree to transact right now.

But prices aren't arbitrary. Over time, prices reflect expectations about future cash flows. A stock trading at $100 with earnings of $5/share has a Price-to-Earnings (P/E) ratio of 20 — investors are willing to pay 20 years' worth of current earnings today, implying they expect significant growth. We'll go deep on valuation in Lesson 4.

Market Capitalization

Market capitalization (market cap) is the total dollar value of all outstanding shares:

Market Cap = Share Price × Shares Outstanding

This is the market's current opinion of what the entire company is worth. Companies are categorized by market cap:

• Mega-cap: $200B+ (Apple, Microsoft, Nvidia)
• Large-cap: $10B–$200B (Walmart, Nike)
• Mid-cap: $2B–$10B
• Small-cap: $300M–$2B
• Micro-cap: below $300M

Market cap differs from enterprise value (EV), which includes debt and subtracts cash — the true "acquisition price" of a company. We'll use EV in Lesson 4.

Why Does the Stock Price Change?

Prices change when new information arrives that changes investors' expectations about future cash flows. Earnings beats, new products, management changes, macroeconomic data, interest rate changes — all move prices by updating the market's collective forecast.

Markets are surprisingly efficient at incorporating public information quickly — professional traders with supercomputers and satellite data compete intensely to be first. This is why it's hard to beat the market consistently: prices already reflect most known information.