What Is a Stock?

A stock is a piece of a company that you own. Buy one, and you own part of that business, with a claim on part of what it owns and earns. You can make money two ways: the price goes up, or the company pays you a dividend, a cash payment from its profits.

A company that needs money can sell pieces of itself to outside investors. Each piece is called a share of stock. The company splits itself into millions or billions of shares, sells some of them, and the buyers become part owners. You don't run the company. But you do own a slice of it, and that slice comes with real legal rights: a share of what's left if the company ever shuts down, and a share of any profit it decides to pay out.

A company with 10 billion shares out there means your one share is one ten-billionth of it. Tiny. But real.

If the whole company doubles in value, your share doubles too. If it goes bankrupt, your share can drop to zero. You win or lose right along with the company, and neither one is guaranteed.

What sets a stock's price on any given day? Whatever a buyer and seller agree it's worth right then, based on guesses about future earnings, the competition, how good management is, and plenty of other things. What a business is really worth and what you pay for a share can be very different, sometimes for years. A stock priced at $50 is not necessarily worth $50. It's just the price where the last buyer and seller agreed to trade. Nothing more.

The first time a private company sells shares to the public is called an IPO, short for initial public offering. Big banks help the company set a price and sell shares to large investors and individuals. The money raised goes to the company, for things like running the business, growing it, or paying off debt. Once those shares are sold, they start trading on a stock exchange, and the company stops getting money from each trade after that. You're just buying from and selling to other investors now, not the company. Buying on the day a company goes public has its own risks worth knowing about first; see why you shouldn't chase an IPO.

A company can also sell more shares later, called a secondary offering. That brings in more money, but it dilutes existing owners: double the number of shares, and each old share now stands for half the ownership it used to. That's why a secondary offering often pushes the stock price down. The opposite happens too. Companies sometimes buy back their own shares from the market, which shrinks the share count and gives the remaining owners a bigger piece each.

Most stocks you'll actually buy have been trading for years, sometimes decades. The IPO price is old news by then. What matters now is what the company is worth today, what it might be worth later, and whether today's price is a fair guess at that.

Nobody can answer those questions consistently. That's the core reason investing involves risk.

Price appreciation just means the price goes up. Buy a share at $40, sell it at $60, and you made $20. The price rises because other investors are now willing to pay more for the same ownership. Maybe the company is earning more. Maybe it's beating its competitors. Or maybe people are just feeling more optimistic about it. The same thing works in reverse when things go badly, and the price falls. Stocks can and do drop all the way to zero. A company can fail completely and take all of its shareholders' money down with it.

Dividends are cash payments some companies make to their shareholders, usually every three months. A company that earns more than it needs to reinvest can hand some of that profit straight to its owners. Own 100 shares of a company that pays $2 per share a year, and you get $200 a year. That money lands in your account no matter what the stock price does that day.

Dividends are never guaranteed, though. The company's board votes on the dividend every quarter, and that vote can go against you. If business gets worse, or the company needs the cash for something else, the board can cut the dividend or stop it completely. Even companies that had paid dividends for decades have cut them during hard times. If you're counting on dividends for income, plan for the chance that they shrink or stop.

Both ways of making money carry the same risk: the company might do worse than everyone expected. A company with a long history of paying dividends can still fail. A stock that has climbed for years can fall just as fast. The two ways a stock makes you money are the same two ways it can lose it.

Common stock is what people mean when they just say "stock." It comes with voting rights, usually one vote per share on things like electing the board, and it carries the full upside and downside of owning the company. Almost everything you see trading under a company's main ticker is common stock.

Preferred stock is a different kind of share from the same company. It pays a fixed dividend, and that dividend gets paid before common stockholders see anything. If the company shuts down, preferred holders also get paid before common holders. In exchange, you usually give up voting rights and most of the upside if the company grows. The price moves more like a bond than a stock, tracking interest rates as much as the business itself. And preferred dividends can still be suspended, and preferred shares can still lose value. "Preferred" just means you get paid first. It doesn't mean it's safer.

Market capitalization, or market cap, is the share price multiplied by how many shares exist. It's what the market currently says the whole company is worth. Large companies (roughly $10 billion and up) tend to be established, with more resources to fall back on. Small companies (under roughly $2 billion) tend to be younger, less proven, and their stock prices swing harder. None of this predicts how a stock will perform. It's just a measure of size, and size loosely predicts how bumpy the ride will be.

Worth knowing which category you're in before you buy.

A stock exchange is just a marketplace where buyers and sellers trade shares of public companies. The two biggest in the U.S. are the New York Stock Exchange and the Nasdaq. Both are open 9:30 a.m. to 4:00 p.m. Eastern time on weekdays, closed on holidays. Most brokerages also let you trade before and after those hours. You can use that if you want, but fewer people are trading then, prices jump around more, and you're more likely to get a price you didn't expect.

When you place an order to buy, you get matched with a seller at that price, or close to it. The price you see quoted is just the last price someone actually paid. Two other numbers matter more in the moment: the bid, the highest price a buyer will currently pay, and the ask, the lowest price a seller will currently accept. The gap between them is called the spread. For popular stocks it's often a penny or less. For stocks that barely trade, it can be much wider, which means you might pay noticeably more than the quote when buying, or get noticeably less when selling.

A market order trades right away at whatever the current price is. A limit order only trades at the price you set or better, so you control the price but not when, or if, it happens. Set a limit the market never reaches, and the order just sits there unfilled.

None of this matters much if you're investing for the long run. Whether you paid $49.95 or $50.05 matters far less than whether the business is good and the price was fair.

An index fund or ETF (exchange-traded fund) bundles many stocks into one investment. A broad U.S. index fund might hold shares in 500 or more companies at once. Buy one share of that fund, and you own a tiny piece of all of them. The fund's price moves with all those companies combined. If one company in a 500-stock index collapses completely, the fund only feels about one five-hundredth of that loss. No single company failing can wipe it out.

Owning individual stocks works differently. If you own shares in one company, everything rides on that company. If it does well, you get the full upside. If it fails, you get zero. Holding just a few stocks concentrates your risk in a way a broad fund doesn't. That concentration can also work in your favor if you pick well, and against you if you don't. There's no guarantee either way.

Index funds and ETFs cost less and spread your risk further. A portfolio of individual stocks takes more research, swings harder stock by stock, and has a real chance of falling behind the broad market in any given stretch. Research consistently shows most professionally managed stock portfolios trail their benchmark over long periods, especially after fees. That doesn't mean picking individual stocks is a bad idea. It just means the bar to do it well is higher than picking companies you've heard of in the news.

At Narstar, all three of our model portfolios hold individual stocks, not funds. Income holds dividend-paying companies selected for cash flow. Growth holds companies with durable competitive advantages. Speculative holds a small number of smaller, riskier companies. You get matched to one portfolio, or a mix, based on your goals and how much loss you can stomach, not how much money you have. If what you actually want is broad, low-cost index exposure, a robo-advisor or your own brokerage account with index ETFs is probably the better fit. Our robo-advisor vs. fee-only adviser article walks through that comparison.

All three Narstar portfolios hold individual stocks, not funds. Each one has its own purpose, its own fee, and its own risk level. You reach out, we send a short questionnaire about your goals, your timeline, and how you'd handle a big loss. Based on your answers, we match you to one portfolio, or a mix of the three. We manage it with what's called discretionary authority, meaning we make the trades without asking you first, each time. Everything sits in your own account at Interactive Brokers, where your assets are covered by SIPC (opens in new tab), up to $500,000, plus $30 million in extra coverage through IBKR. SIPC covers you if the broker fails. It does not cover you if your investments lose value.

For regular taxable accounts, Income charges 0.60% a year and holds dividend-paying companies selected for cash flow. Growth charges 1.20% and holds companies with durable competitive advantages. Speculative charges 1.60% and holds a small number of smaller companies. Traditional, Roth, Rollover, SEP, and SIMPLE IRA accounts are all charged a uniform 1.00% a year regardless of model portfolio mix. We bill advisory fees quarterly in arrears, and Interactive Brokers may charge its own separate trading fees on top. Dividends are never guaranteed, even a strong company can decline, and losses in Speculative can be severe.

All three carry real risk. Stocks fall. Companies fail. These portfolios are not guaranteed to produce any particular outcome, and past decisions don't predict future results.

The standard minimum is $3,000 per Model Portfolio in a non-retirement account, and $3,000 per account in a Traditional, Roth, or SEP IRA, where one account can hold more than one model portfolio. A new client may open one $100 Starter Account, which must reach $3,000 by the last day of the sixth calendar month after opening. SIMPLE IRA participant accounts have a $0 minimum and are not eligible for the Starter Account. Our homepage fee calculator estimates your Narstar advisory fee at any balance. Interactive Brokers charges separate brokerage commissions and fees.

How do I actually buy a stock?

Open a brokerage account, put money in it, and place an order for the shares you want. That part takes minutes. The hard part is deciding which company to buy, at what price, and how it fits with everything else you own, and the order form doesn't help you with any of that. If you'd rather someone else make and manage that decision, that's what an investment adviser is for.

Can I lose more money than I invest?

Not if you're paying with your own cash. The worst case is the stock falling to zero and you losing what you put in. That changes if you borrow money to invest, called margin, or trade certain derivatives, where you can lose more than you put in. Narstar's portfolios never use margin. But even without it, losing everything you put into one stock is a real possibility worth taking seriously.

Do I get voting rights when I buy a share?

Usually, yes, if it's common stock. You get one vote per share on things like electing the board, cast once a year by proxy. With one share of a company that has billions of shares out there, your vote is real, just tiny. Some companies also create multiple share classes where founders get extra votes per share, so it's worth checking the structure before assuming your vote carries much weight.

How many stocks should I own?

There's no magic number, and anyone who gives you one is oversimplifying. Own fewer stocks, and each one matters more, for better or worse. Own more, and you're more spread out, with results closer to the overall market. Where you land depends on how much risk from any single company you're willing to carry. Our three portfolios each answer that differently, which is why we match clients by questionnaire instead of picking one off a shelf.