A stock is a small piece of ownership in a company

When you own a stock, you own a share of that company. If a company issues 1,000 shares and you own 10 of them, you own 1% of the company. Companies sell stock to raise money for operations, expansion, or paying off debt. In return, you get a claim on part of the company's profits and assets.

Stocks trade on exchanges — marketplaces where buyers and sellers meet. The most well-known are the New York Stock Exchange (NYSE) and the NASDAQ. A stock's price changes throughout the trading day based on supply and demand. If more people want to buy a stock than sell it, the price goes up. If more people want to sell than buy, the price goes down.

Key Takeaways

  • Owning a stock means you own a percentage of a company, and the company's value directly affects what your stock is worth.
  • Stock prices move based on how many people want to buy or sell, company performance, and broader economic conditions.
  • You can make money from stocks in two ways: the price goes up and you sell for more than you paid, or the company pays dividends (a share of profits) to shareholders.
  • Stock markets are open during business hours on weekdays, and you need a brokerage account to buy or sell shares.
  • Stocks carry risk — a company's value can fall, and you could lose some or all of your money if the company fails.

How stock prices move

Stock prices reflect what investors think a company is worth right now and what it will be worth in the future. When a company reports strong earnings, the stock usually rises because investors believe the company will continue to do well. When a company misses expectations or faces problems, the stock usually falls.

Broader economic conditions also move stock prices. If interest rates rise, investors may sell stocks and move money into bonds or savings accounts that now pay more. If the economy slows, people worry companies will make less profit, so they sell stocks. News, political events, and industry changes can all shift prices in minutes.

Two ways to make money from stocks

Capital gains happen when you sell a stock for more than you paid. If you buy a stock at $50 and sell it at $75, you make a $25 gain. You only realize this gain when you actually sell — if the price goes up but you hold the stock, you have an unrealized gain on paper.

Dividends are payments some companies make to shareholders from their profits. Not all companies pay dividends; many younger or faster-growing companies reinvest all profits back into the business. When a company does pay a dividend, it usually happens quarterly (four times a year). You receive the payment whether the stock price goes up or down, as long as you own the stock on the payment date.

What you need to buy stocks

You cannot buy stocks directly from a company in most cases. You need a brokerage account — an account with a firm that buys and sells stocks on your behalf. Common brokerages include Fidelity, Charles Schwab, E-Trade, and Robinhood. Many brokerages charge no commission to buy or sell stocks anymore, though some may charge fees for certain services.

To open a brokerage account, you provide your name, address, Social Security number, and employment information. The process usually takes a few minutes online. You then link a bank account and transfer money into the brokerage account. Once the money settles (usually one to three business days), you can place an order to buy stocks.

Stock market hours and how orders work

The stock market is open Monday through Friday, 9:30 a.m. to 4:00 p.m. Eastern Time. This is called regular trading hours. Some brokerages offer extended hours trading before the market opens (starting at 4:00 a.m.) and after it closes (until 8:00 p.m.), but prices can be less stable and spreads wider during these times.

When you place an order to buy a stock, you can use a market order (buy immediately at whatever the current price is) or a limit order (buy only if the price drops to a certain level you set). Market orders fill right away but at an unpredictable price. Limit orders may never fill if the price never reaches your target, but you control the price you pay.

The difference between stocks and bonds

Stocks represent ownership in a company. Bonds represent a loan you make to a company or government. When you buy a bond, the issuer promises to pay you interest and return your principal on a set date. Bonds are generally less risky than stocks because you get a fixed payment regardless of how the company performs.

Stocks have more upside potential — if a company does very well, your stock can double or triple. But stocks also have more downside risk — if a company fails, your stock can become worthless. Bonds pay a fixed amount, so your return is more predictable but usually lower than what you might make from stocks over time.

Risk and what can go wrong

Stock prices can fall sharply and stay down for years. If you buy a stock at $100 and it drops to $30, you have lost 70% of your money. You only recover that loss if the stock price rises again — and it may never do so. Companies can also go bankrupt, in which case shareholders often lose everything while bondholders and employees may recover some value.

Market crashes happen periodically. In 2008, the stock market fell roughly 50% over the course of a year. In March 2020, the market fell 30% in weeks before recovering. If you need your money soon, a market downturn can force you to sell at a loss. This is why financial advisors often recommend holding stocks for at least five to ten years and keeping money you need within the next few years in safer places like savings accounts.

Frequently Asked Questions

Do I have to own a lot of stocks to make money?

No. You can buy a single share of a stock, and many stocks trade for under $100 per share. Some brokerages also offer fractional shares, meaning you can buy a portion of a share for any dollar amount you want. Your returns scale with how much you invest — if you invest $100 and the stock goes up 10%, you make $10.

What happens if a company I own stock in goes out of business?

Your stock becomes worthless. As a shareholder, you are last in line to receive anything if a company liquidates — employees, creditors, and bondholders get paid first. In most cases, shareholders receive nothing. This is why owning a mix of different stocks (called diversification) reduces the damage if one company fails.

Can I lose more money than I invested?

With regular stock purchases, no. The worst case is your stock goes to zero and you lose your entire investment. However, if you use margin (borrowing money from your broker to buy stocks), you can lose more than you invested because you owe the borrowed amount back regardless of what happens to the stock.

How do taxes work with stocks?

When you sell a stock for a profit, you owe capital gains tax on that profit. The tax rate depends on how long you held the stock — if you held it over a year, it is taxed at the long-term rate (usually lower). If you held it under a year, it is taxed at your regular income tax rate. Dividends are also taxable in the year you receive them. A tax professional or accountant can explain your specific situation.

Should I pick individual stocks or buy funds?

Individual stocks require research and carry more risk if you pick poorly. Many people instead buy mutual funds or exchange-traded funds (ETFs), which hold dozens or hundreds of stocks in one purchase. This spreads risk across many companies. Index funds track a market index like the S&P 500 and are a common low-cost way to own stocks without picking individual companies.