What Is Stock? A Beginner’s Guide to How Stocks Work

“ The Stock Market is the Greatest Wealth Generator Ever Devised” - The Motley Fool

What is a Stock?

Simply put, a stock is a fractional ownership share in a company.

In order to understand what this means lets imagine that Apple issues 100 stocks. By issue, we mean that they sell the stocks to the public in order to raise money. In this example they have decided to divide the pie (ie. the entire company) into 100 equal parts (ie. stocks). Each stock would therefore represent 1% ownership of the total company. The owners who purchase those stocks, that were issued by Apple, would theoretically have a 1% stake in the company.

Although this sounds nice in theory, it wouldn’t work with a company as large of Apple. The most obvious reason for this would be the lack of available buyers. As of today, Apple is currently valued at 3.59 trillion dollars. So, a 1% ownership share would be worth, hold your breath… thirty-four billion seven hundred million dollars. It would be hard to find a normal person with enough cash to purchase that stock.

Instead, companies like Apple issue enough shares so that the average person, like you and I, can get in on the action. In Apple’s case, they reported 15.17 billion shares outstanding as of January 2025. So, by purchasing a stock in Apple, you technically become a partial owner of the company, albeit with a very small percentage share of the larger pie.

Clarifying Terms

An important point to keep in mind in order to avoid any confusion, is that the terms “stocks,” “shares,” and “equity” are slightly different, but are often used interchangeably (ex. like tomato and tomahto).

Why Do Companies Issue Stocks?

The major benefit of owning a company’s stock is that you get to share in the company's earnings. In other words, if they make money… you make money. Now with this in mind I’m sure your spidey senses are probably tingling, and you are thinking to yourself, why would companies want to make me richer?

The reason for this is that buying a stock from a company is a mutually beneficial relationship.

In a corporations natural growth trajectory, they will inevitably run into situations that require more money then they currently have on hand. In these scenarios they have a few main options:

1. Retained Earnings

The first option, and most obvious is that they can increase their profit by reducing expenses, or increasing profit margins. Although this sounds simple it is often difficult to implement, and it takes time. Also, the amount of money required for expansion may be much larger then this strategy would produce.

2. Borrow Money

The second option, would be for them to go to the bank and get a loan. Similar to how you and I would fund a large purchase like a house or a car. In this case, they borrow money from the bank, and promise to pay the loan back with interest. This is a common and effective strategy for fueling growth. However, not dissimilar to us, there is a risk to having too much debt for companies. An inability to pay the interest on their loans could result in a bankruptcy.

3. Issue Stocks and Bonds

The final option, is that they can issue stocks and bonds that you and I can purchase. We will expand further into bonds during our next article. However, for now just understand that it is another way for a corporation to raise money. Similar to debt, the issuance of stocks is both a fast and effective strategy for raising money to fund expansion. The main benefit is that this strategy doesn’t come with the risk of bankruptcy. The downside on the other hand is that they give up a ownership stake to the public shareholders.

How do stocks benefit the public? (You and I)

The benefit to individual investors, like you and I, is that stock issuance allows us to obtain ownership in businesses that we otherwise wouldn’t have access to. If you wanted to purchase a local business, like a hardware store, you’d typically pay a multiple of their yearly revenue. For example, let’s imagine a company that makes $250,000 in yearly revenue and sells at 3x multiple (ie. 3x yearly revenue). In this case you would have to pay $750,000 in order to purchase that business. An amount most of us do not have access too…

Even better, the issuance of stock allows us to access large successful local businesses and international businesses from all around the world. Much of the stock market is made up of great businesses that we interact with on a daily basis. The stock market allows us to purchase a piece of those businesses from the comfort of our own home.

Conclusion

To sum up, investing in stocks can be a powerful way to grow your wealth over time. By owning shares in companies, you can benefit from their growth and profitability. But always remember to never just buy a stock just because, it’s important to always do your homework and stay informed about your investment.

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Disclaimer: The information discussed in this blog is not financial advice, and is meant for educational purposes only. Please consult a personal financial expert before making any financial decisions.

Citations

• The stock market is the greatest wealth generator. (2024, August 27). The Motley Fool. https://www.fool.com/investing/2024/08/27/the-stock-market-is-the-greatest-wealth-generator/