What are stocks? How do stocks work?


Stock basics for beginners:


Fundamentally, a stock is a piece of a company.  When companies need more funds, the company can sell stocks to people via the stock market. Stocks on the market are traded at whatever value the market decides the company is worth. So when you own a stock, you own a small portion of that company.


A stock is, basically, a part of a company you can own for a price. Stocks can be fairly risky, but typically, have high returns. Investors trade stocks (parts of a company) on the market.


A large number of factors determine a stock's value, and therefore the value of the company.  Usually, these factors include:

  • Assets the company owns
  • Previous sales
  • Expected future sales

We get into these factors more on the Valuing a Stock page.


The company is broken into parts then sold to investors

Simple example:


Johnny is starting the company that produces apples.  He currently owns one apple tree; the market value of the tree is $100.

To keep things simple, Johnny owns one tree (market valued at $100) so his company is worth $100.

In order to raise funds, he decides to sell shares of his company to people.  Because his company is worth $100, he sells four shares at $25.00 apiece.

 Example of how a stock has value


Johnny then buys another tree; his company is now worth $200.  Because the value of the company is now $200 ($100 for each tree) each stock is now worth $50.00 a share (because there are four stocks), some stockholders will sell the stocks for $50.00 to other investors (like yourself).

Example of how stock value grows

In reality, determining a shares value is much more complicated, the value of a company is, fundamental, determined by markets. Because stocks are a portion of a company the value is liked to what the market thinks the company is worth.


Actual Example:


Johnson & Johnson (NYSE:JNJ) has 2.77 Billion shares in existence. The market price for a single share of JNJ is $97.46 (on 1 July 2015) so the value of the company is:

Value of JNJ=

Shares*Value of Shares

=2.77 billion shares*$97.46

=$270.87 Billion



So if you own a three shares of JNJ, out of the total (2.77 billion), then you own roughly one billionth of the company, but, you will still get to vote on the new president and other matters for the company.


How this grows your money:

If the company value increases to the market your stock will be worth more and you can sell it for a gain. However, if a company becomes worth less your share will be worth less. Stocks are risky.


Overall market returns:

Over the past several years, this has been the overall return from the total market (from the Russell 1000 Index). If the future is like the past these are the returns most stocks will yield:

Yearly returns on a stock

Article by Jacob K Lloyd


Published: 2 July 2015

Last updated: 13 Sep 2015

A company broken into stocks and sold on the market to investors

Example: A company with four stocks on the market

Example: how a stock gains value

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