What Is a Stock?

A stock represents a share of ownership in a corporation. When you buy a stock, you become a partial owner of that business, with a claim on a portion of its assets and earnings. You can earn returns through price appreciation (the stock price increasing) or dividends (cash payments from the company's profits to shareholders).

A company that wants to raise money can sell pieces of itself to outside investors. Each piece is called a share of stock (or equity). The company carves itself into millions or billions of shares, sells some portion to raise capital, and the buyers become part-owners. You don't run the company day to day. But you do own a slice of it, and that comes with specific legal rights: a proportional claim on the company's assets if it ever winds down, and a proportional claim on any earnings the company chooses to distribute.

One share of a company that has issued 10 billion shares gives you one 10-billionth of the company. Tiny. But real.

If the company's total value doubles, your share is worth twice as much. Goes bankrupt? Your share can go to zero. The upside and the downside both scale with your ownership stake, and neither outcome is guaranteed.

So what determines a stock's price on any given day? Whatever buyers and sellers currently agree it's worth, based on their collective views about future earnings, competitive position, management quality, and dozens of other factors. The underlying value of a business and the price you pay for a share can diverge sharply, sometimes for years. A stock priced at $50 isn't necessarily worth $50. It's the price at which the most recent willing buyer and seller completed a transaction. Nothing more.

The first time a private company sells shares to the public is called an initial public offering, or IPO. The company works with investment banks to set a price and sell shares to institutional and individual investors. Proceeds go to the company for operations, expansion, or debt repayment. Once the shares are sold, they start trading on a stock exchange. After that point, the company doesn't receive any more money from those trades. You're just buying from and selling to other investors.

A company can also issue additional shares after the IPO through a secondary offering. More capital comes in, but existing shareholders get diluted: double the share count and each existing share represents half the ownership it did before. That's why secondary offerings often push a stock price down. The reverse exists too. Companies sometimes buy back their own shares from the open market, which reduces the share count and concentrates ownership among fewer holders.

Most stocks you'll actually buy and sell have been trading publicly for years or decades. The IPO price is history. What matters today is what the company is worth now, what it might be worth in the future, and whether the current stock price reflects that accurately.

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

Price appreciation is the most visible one. Buy a share at $40, sell it at $60, and you've made $20 on that position. The price went up because other investors became willing to pay more for the same ownership stake. Maybe earnings grew. Maybe the competitive position strengthened. Maybe the market just got more optimistic. The same mechanism runs in reverse: earnings disappoint, competition intensifies, confidence falls, and the price drops. Stocks can and do go to zero. A company can fail entirely, taking all shareholder value with it.

Dividends are cash payments some companies make to shareholders, usually quarterly. A company that earns more than it reinvests may distribute a portion of that profit directly to owners. If you own 100 shares of a company that pays $2 per share per year, you receive $200 in dividends annually. That cash hits your account regardless of what the stock price does that day.

But dividends aren't guaranteed. A company's board of directors votes on dividend payments each quarter, and that vote can go the wrong way. Business deteriorates, the company needs cash for operations, the board decides to use earnings differently, and dividends get cut or eliminated entirely. Companies that have paid dividends for decades have still cut them during financial stress. Any strategy that depends on dividends for income must account for the real possibility that those payments will shrink or stop.

Both sources of return carry the same fundamental risk: the underlying company may perform worse than expected. A company with a long dividend history can fail. A stock that has risen for years can fall just as far. The two ways stocks make money are also the two ways they lose it.

Common stock is what people mean when they say "stock" without qualification. It carries voting rights (usually one vote per share for board elections and major corporate decisions) and the full upside and downside of ownership. Nearly everything that trades on an exchange under a company's main ticker is common stock.

Preferred stock is a different security from the same company. It pays a fixed dividend that gets paid before any common stock dividend, and preferred holders stand ahead of common holders if the company is liquidated. The trade-offs: usually no voting rights, and limited participation in the company's growth. The price behaves more like a bond than a stock, rising and falling with interest rates as much as with the business. Preferred dividends can still be suspended. Preferred shares can still lose value. "Preferred" describes payment order, not safety.

Market capitalization (market cap) is the company's share price multiplied by its total share count. It's what the market currently says the whole company is worth. Large-cap companies (roughly $10 billion and up) tend to be established businesses with deeper resources. Small-cap companies (under roughly $2 billion) tend to be younger, less proven, and more volatile. None of these categories predicts performance. They describe size, and size correlates loosely with how violently the price tends to swing.

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

A stock exchange is an organized marketplace where buyers and sellers transact in shares of publicly listed companies. The two largest in the United States are the New York Stock Exchange (NYSE) and Nasdaq. Both operate 9:30 a.m. to 4:00 p.m. Eastern time on weekdays, excluding holidays. Pre-market and after-hours trading exists at most brokerages. Use it if you want, but liquidity is thinner, prices swing more, and you're more likely to fill at 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 the last transaction price. Two other numbers matter: the bid (highest price a buyer is currently willing to pay) and the ask (lowest price a seller will accept). The gap between them is the spread. For actively traded stocks, it's often a penny or less. For thinly traded ones, it can be much wider. That means you might buy at a meaningfully higher price than the quote and sell at a meaningfully lower one.

Market orders execute immediately at the prevailing price. Limit orders execute only at your specified price or better, which gives you control over price but not timing. Set a limit price the market never reaches and the order just sits there.

Does any of this matter if you're investing long-term? Honestly, not much. The difference between filling at $49.95 versus $50.05 matters far less than the quality of the underlying business and whether the price you paid reflects reasonable value.

An index fund or ETF (exchange-traded fund) bundles many stocks together into a single investment. A broad U.S. market index fund might hold shares in 500 or more companies at once. Buy one share of that fund and you indirectly own a small piece of all of them. The fund's price rises and falls with the collective performance of its holdings. If one company in a 500-stock index collapses entirely, the impact on the fund is roughly one-five-hundredth of that loss. No single company failing can destroy it.

Individual stocks are a different animal. If you own shares in one company, your outcome rides on that company alone. Does well? You get the full upside. Fails? Zero. Holding a small number of individual stocks concentrates risk in a way a broad fund doesn't. That same concentration can produce stronger results if the companies selected perform well, and worse results if they don't. No structural guarantee either way.

Index funds and ETFs carry lower costs and broader diversification. Individual stock portfolios involve more research, more volatility at the position level, and a higher chance of underperforming the broad market over any given period. Studies consistently show that most actively managed stock portfolios trail their benchmark index over long periods, especially after fees. That doesn't mean individual stock investing is wrong. But the bar for it to make sense is higher than picking companies you recognize from the news.

At Narstar, we use individual stocks in all three model portfolios, not funds. Income holds dividend-paying companies selected for cash flow; Growth holds companies with durable competitive advantages; Speculative concentrates in a small number of smaller companies at higher risk. You get matched to one portfolio or a combination based on your goals and tolerance for loss, not your balance size. But if broad, low-cost index exposure is what you want, a robo-advisor or a self-directed brokerage account with index ETFs is likely the better fit. The robo-advisor vs. fee-only adviser article covers that comparison directly.

All three Narstar portfolios are built from individual stocks, not funds. Each has a specific purpose, a specific fee, and a specific risk level. You reach out, we send a short questionnaire about your goals, timeline, and how you'd handle a significant loss. Based on your answers, you're matched to one of the three or a combination. We manage it with discretionary authority: we make trade decisions without asking you on each one. Everything lives in your account at Interactive Brokers, where assets are covered by SIPC (opens in new tab) (up to $500,000, with $30 million in excess coverage through IBKR). SIPC protects against broker failure, not investment losses.

The Income portfolio charges 0.60% per year and holds dividend-paying companies selected for cash flow. Dividends aren't guaranteed, and rate changes or sector downturns can push the value down hard. The Growth portfolio is 1.20% per year, built around companies with durable competitive advantages and a long time horizon. Even well-positioned companies decline, and periods of underperforming the broad market can last years. The Speculative portfolio runs 1.60% per year and concentrates in a small number of smaller companies. It's the highest-risk option. Losses can be severe, and it's not right for most people.

All three carry real risk. Stocks fall. Companies fail. None of these portfolios are guaranteed to produce any particular outcome, and past decisions don't predict future results.

Minimum account size is $3,000. The homepage fee calculator shows the dollar amount at any balance.

How do I actually buy a stock?

Open a brokerage account, deposit money, and place an order for the shares you want. The mechanics take minutes. The decision about which company to buy, at what price, and how it fits with everything else you own is the hard part, and it's the part the order form doesn't help with. If you'd rather have that decision made and managed for you, that's what an investment adviser does.

Can I lose more money than I invest?

If you're buying stocks with cash you own, no. The worst case is the stock going to zero and losing what you put in. That changes if you borrow to invest (margin) or trade certain derivatives, where losses can exceed your deposit. Narstar's portfolios don't use margin. But a 100% loss on a position is still a real possibility worth taking seriously on its own.

Do I get voting rights when I buy a share?

With common stock, usually yes: one vote per share on board elections and major corporate matters, cast by proxy each year. With one share of a multi-billion-share company, your vote is real but microscopic. And some companies issue multiple share classes where founders hold shares with extra votes, so it's worth knowing the structure before assuming your vote carries weight.

How many stocks should I own?

There's no magic number, and anyone selling you one is oversimplifying. Fewer holdings means each one matters more, in both directions. More holdings means more diversification and results closer to the broad market. Where you land depends on how much company-specific risk you're willing to carry. Our three portfolios each answer that question differently, which is why clients get matched by questionnaire rather than picking off a shelf.