What an equity investment is

An equity investment means you own a piece of a company. When you buy stock, you are buying a small share of that business — its assets, its earnings, and its future value. If the company does well, your share becomes worth more. If it struggles, your share loses value. You are not lending money to the company (that would be a bond); you are becoming a part-owner.

Equity is different from other ways to invest your money. With a savings account, the bank pays you interest. With a bond, a company or government pays you back with interest on a set date. With equity, there is no may provide return — you make money only if the stock price rises or if the company pays you a dividend (a share of profits).

Key Takeaways

  • When you buy stock, you own a percentage of a company and share in its profits or losses.
  • Stock prices move based on how well the company performs and what investors think it will be worth in the future.
  • You can make money through price increases or through dividends, but you can also lose money if the stock price falls.
  • Stocks are riskier than bonds or savings accounts, but historically have returned more money over long periods.
  • You buy and sell stocks through a brokerage account, which you can open online with most banks or investment firms.

How stock prices move

Stock prices change throughout the day based on what buyers and sellers think the company is worth right now. If a company reports strong earnings, more people want to buy the stock, and the price goes up. If the company misses targets or faces bad news, more people want to sell, and the price falls.

Prices also move based on what investors expect will happen in the future. A company might be unprofitable today but have a stock price that rises because investors believe it will be profitable later. The opposite is also true — a profitable company's stock can fall if investors think its best years are behind it.

This means the price you pay for a stock today might be higher or lower tomorrow. You have no control over that price movement, and neither does the company. It is set by the market — by the millions of trades happening every day.

The difference between stocks and bonds

A bond is a loan you make to a company or government. They promise to pay you back the money you lent plus interest on a specific date. You know roughly how much you will get back (unless the borrower defaults). A bond is generally lower risk because the payment is promised in advance.

A stock is ownership, not a loan. There is no promise of repayment. The company can use its money however it wants — to grow, to pay workers, to buy other companies. You make money only if the stock price rises or if the company decides to pay dividends. Stocks are riskier because there is no may provide return, but they have historically returned more money over long periods than bonds.

How you make or lose money on stocks

You make money on a stock in two ways. First, the price can rise — if you buy at $50 and sell at $75, you keep the $25 difference. Second, some companies pay dividends, which are portions of company profits paid directly to shareholders. You receive dividends while you own the stock, whether the price goes up or down.

You lose money if the stock price falls below what you paid for it. If you buy at $50 and the price drops to $30, you have lost $20 per share (on paper, until you sell). You can also lose money if you sell during a downturn — the loss becomes real only when you sell at a lower price than you paid.

Some stocks pay no dividend and rely entirely on price growth. Others pay steady dividends but the price barely moves. Most investors hold a mix of both types, depending on whether they want current income or long-term growth.

Risk and return over time

Stocks are riskier than bonds or savings accounts in the short term. A stock can lose 20 or 30 percent of its value in a single year. Over decades, however, stocks have historically returned about 10 percent per year on average (though this varies by year and by which stocks you own).

This is why financial advisors often say that younger people can afford to own more stocks — they have time to ride out bad years and benefit from the long-term average. Someone nearing retirement might own fewer stocks and more bonds, because they cannot afford to wait for a recovery if the market drops.

Past performance does not may provide future results. A stock that rose 50 percent last year might fall 50 percent this year. The historical average is useful for planning, but it is not a promise.

How to buy and sell stocks

You buy stocks through a brokerage account, which is an account at a bank, investment firm, or online platform that lets you trade stocks. You deposit money into the account, then use that money to buy shares. When you want to sell, the brokerage sells your shares and puts the money back into your account.

Most brokerages charge a small fee per trade or a monthly subscription. Some charge nothing for trades but make money other ways (by lending your shares or using your cash). You can open a brokerage account online in minutes with most major banks and investment firms.

You can also own stocks indirectly through a mutual fund or exchange-traded fund (ETF), which is a collection of many stocks bundled together. Instead of picking individual companies, you buy one fund that owns pieces of hundreds of companies. This spreads your risk — if one company fails, it is a small part of your fund.

Frequently Asked Questions

Do I have to own stock in just one company?

No. Most people own stocks in many companies, either by buying individual stocks or by buying a fund that owns hundreds of stocks. Owning many stocks reduces your risk — if one company fails, it does not wipe out your investment.

What happens if a company goes bankrupt?

If a company goes bankrupt, your stock becomes worthless. You lose the money you invested. This is why diversification matters — owning many stocks means one bankruptcy does not destroy your entire portfolio.

Can I lose more money than I invested?

No, not with stocks. The worst case is that the stock price falls to zero and your investment is worthless. You cannot owe money to the brokerage or the company. (This is different from some advanced trading strategies, but basic stock ownership has a floor at zero.)

Do I have to hold a stock forever?

No. You can sell a stock anytime the market is open. You might hold for decades or for days. The longer you hold, the more time you have to benefit from price growth, but you also tie up money that could be used elsewhere.

What is the difference between a stock and a share?

They mean the same thing. A share is one unit of ownership in a company. If a company has issued one million shares and you own 100, you own 0.01 percent of the company. Stock is the general term for ownership; a share is one piece of that ownership.