Ownership, not a loan
A company that wants to raise money has two choices: borrow it (debt) or sell a slice of itself (equity). When a company chooses equity, it divides itself into millions of equal pieces called shares. Each share represents a fractional ownership stake — a legal claim on a proportional share of the company's assets and future earnings.
This is fundamentally different from a bond or a bank deposit. Shareholders are owners, not creditors. If the company does well, the value of your ownership stake grows. If it does poorly, your stake is worth less. There is no guaranteed return.
Why companies issue stock
Companies go public to raise capital — money for expansion, product development, hiring, or paying off existing debt. The first time a private company sells shares to the public is called an Initial Public Offering (IPO). After that, shares trade freely between investors on stock exchanges like the NYSE, NASDAQ, or London Stock Exchange.
The company itself doesn't make money from secondary market trading (you buying from another investor). But a high share price matters — it makes future fundraising cheaper, keeps employee stock compensation valuable, and signals market confidence.
Two ways to profit from stocks
If the company grows and more investors want to own it, demand pushes the share price up. You sell for more than you paid. The profit is called a capital gain.
Mature, profitable companies sometimes distribute a portion of earnings to shareholders as a regular cash payment — a dividend. Paid quarterly in most markets.
Most growth stocks (tech, biotech) reinvest all earnings and pay zero dividends. Most dividend stocks (utilities, consumer staples, banks) grow slowly but provide income. Many beginners start with growth stocks and add dividend stocks as they move toward income.
What determines share price?
Prices are set continuously by supply and demand — millions of buyers and sellers agreeing on a price in real time. But what drives their decisions? Primarily:
- Earnings — the company's profit growth (or lack of it)
- Expectations — what investors believe future earnings will be
- Macro conditions — interest rates, inflation, economic growth
- Sentiment — fear, greed, news, narratives
Technical analysis studies price and volume patterns to time entries and exits. Fundamental analysis studies the business itself to determine whether the price is justified by the underlying value. Most serious investors use both.
What does owning a share of stock actually represent?