If you own a share of stock in a company, it means that you own an economic interest in the underlying business. But there's more to the story than that. Here's a rundown of what a share of stock is, and what investors should know about how shares of stock work.
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What is it?
What is a share of stock in a company?
You'll often hear the words "shares" and "stocks" used interchangeably, but there is a difference. The term stock is used to express equity ownership in a business. A stock represents a piece of ownership in a corporation.
On the other hand, a share of stock is aunit of ownership in the business. The number of shares determines how big of a piece of ownership in a business you have. If a company has 100,000 outstanding shares of stock and you own 1,000, you have a 1% equity ownership stake in the company's business.
If a company chooses to pay a dividend, it will be divided proportionally based on the total number of shares that exist. If stock owners have voting rights in corporate affairs, the voting rights given to shareholders are typically dependent on the number of shares you own.
Taking the terminology a step further, ashareholder is an individual who owns shares of stock in a company. This term is often (correctly) used interchangeably with stockholder.
The value of a share of stock depends on several factors, such as the sales, growth, or profitability (or lack thereof) of the underlying business, as well as overall market factors such as the health of the economy, interest rate conditions, and more.
Public vs. Private
Public versus private companies
While the general idea is the same in regard to equity in a business, there are some stocks that trade on the public stock markets and some that don't.
Publicly traded stocks are the most visible. These are companies like Microsoft (MSFT -0.19%) and Coca-Cola (KO 0.01%) whose shares can be bought on major stock exchanges by anyone with a funded U.S. brokerage account. But it's important to understand that privately owned companies have shares of stock as well -- they are just not available for purchase by everyday investors. The process a private company uses to become a publicly traded company, and therefore allow its shares to be owned by everyday investors, is known as an initial public offering, or IPO.
Types
Different types of stock
Technically speaking, there are two different types of shares of stock that you could buy -- common stock and preferred stock.
- Common stock: Common stock is what most people think of when they hear the word "stock." Common stock represents an equity ownership interest in a business, as discussed earlier. It's also worth mentioning that there can be different classes of common stock, even among the same company. For example, Alphabet (GOOGL -1.05%)(GOOG -1.04%) has two different classes of publicly traded stock. The difference? One has voting rights when it comes to electing board members and other shareholder votes, and the other doesn't.
- Preferred stock: Preferred stocks work quite differently -- they are more like fixed-income instruments, with a predetermined dividend amount and par value. Unlike with a common stock, preferred stocks don't represent a proportional share of a company's earnings -- no matter what a company earns, preferred shareholders get the same dividend and the intrinsic (par) value of the shares remains the same. Preferred shareholders don't have voting rights, while common shareholders generally do. Preferred dividends are generally superior to common dividends in terms of priority -- if a company is struggling financially, preferred stockholders must get paid before any common shareholders are. Preferred shareholders are higher in priority when it comes to claims on a company's assets in bankruptcy situations.
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Fractional Shares
Do you have to buy a whole share of stock?
Shares of stock are the smallest units of ownership in a company, but they aren't necessarily the smallest units that individual investors can own. In recent years, many brokerages have started to offer fractional shares to their clients, which can especially come in handy with high-priced stocks like Amazon.com (AMZN -0.13%). Without getting too technical, the key point to know is that the brokerage is still buying whole shares, but is essentially selling bits and pieces to its clients. In other words, if three investors wanted to buy 0.1, 0.4, and 0.5 shares of Amazon, respectively, the brokerage would buy one share and allocate it among the investors' accounts, dividing dividends and economic rights proportionally.
The takeaway is that if your brokerage offers fractional share investing, you don't necessarily need to buy a whole share of a stock to get an equity interest in the company.
Learn more about shares
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Matthew Frankel, CFP® has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
FAQs
Owning a share means owning part of a business, with dividends and voting rights. Stocks may be publicly traded (like Microsoft) or privately held. Understanding IPOs helps grasp accessibility to ownership.
What is one share of stock? ›
A share is the smallest denomination of a company's stock. So, each unit of stock is a share, and each share of stock is equal to a piece of the company's ownership. Suppose a person X owns '100 shares of ABC Inc. ' Now if ABC Inc. has one lakh shares, it means X owns 0.1% of the company.
What does owning a share of stock mean? ›
Shares are units of stocks issued by a corporation that represent ownership. They are sold to investors and traders to raise capital for the company. Many businesses issue stocks and shares when they need funds for research and development, expansion, or other growth opportunities.
What is the difference between a stake and a share? ›
If you own stock in a given company, your stake represents the percentage of its stock that you own. Investing $50,000 in that company could entitle you to 20% of that business's profits going forward. Shares. When a company issues stock, each unit of stock is considered a share.
What is the difference between a stock and a share? ›
Stocks represent part ownership of a company A stock is a financial instrument representing part ownership in single or multiple organizations. A share is a single unit of stock. It's a financial instrument representing the part ownership of a company. Shares are categorized into common shares and preference shares.
What does 100 shares of stock mean? ›
In stocks, a round lot is considered 100 shares or a larger number that can be evenly divided by 100. In bonds, a round lot is usually $100,000 worth. A round lot is often referred to as a normal trading unit and is contrasted with an odd lot.
Is it worth owning one share of stock? ›
An advantage of purchasing only one share is that, for the most part, it's a low-cost way to gain exposure to the stock market. Additionally, buying a single share can provide an opportunity to get a feel for how Wall Street (and the overall stock market) works and the mechanics behind investing.
Does owning 1 shares make you an owner? ›
As an investor in a company, you own a portion of the company (no matter how small that portion is); however, this doesn't mean that you own property of the company.
What happens when you buy a share of stock? ›
When you buy a share in a company, you're effectively becoming a part owner of that company. As a shareholder, with an equity stake in that business, the investment return you earn depends on the success or failure of the company itself.
Does owning shares make you money? ›
There are two ways to make money from owning shares of stock: dividends and capital appreciation. Dividends are cash distributions of company profits.
Stocks are shares of ownership in publicly traded companies. Companies issue them on stock exchanges to raise money, at which point investors buy and sell them based on their potential to go up in value or pay dividends. Buying and holding stocks can help you grow your wealth and reach your long-term financial goals.
How many shares is one stock? ›
A share is a unit of ownership while a stock is a broad term for the investable asset. Owning 100 shares implies you have 100 units of one company's stock, while owning 100 stocks means you have stakes in 100 different companies.
What is share with example? ›
Consider a hypothetical company, ABC Ltd., which decides to raise capital by offering shares to the public. If an investor purchases 100 shares out of the 1,000 total shares issued by ABC Inc., they would own 10% of the company.
What is a share for dummies? ›
A company sells shares to raise money, rather than borrowing it from a bank. In return for the cash investment, the shareholder usually gets a share of the profits, known as a dividend. The board decides whether a dividend is going to be paid, if it is financially sound to do so, and how much each share will get.
Do you buy a stock or a share? ›
Of the two, "stocks" is the more general, generic term. It is often used to describe a slice of ownership of one or more companies. In contrast, in common parlance, "shares" has a more specific meaning: It often refers to the ownership of a particular company.
Do you get dividends from shares? ›
Last updated: 9 Apr 2024
Profits made by companies limited by shares are often distributed to their members (shareholders) in the form of cash dividend payments. Dividends are issued to all members whose shares provide dividend rights, which most do.
Is 100 shares a lot of stock? ›
The number of units is typically conveyed by the lot name. A round lot is 100 shares in the stock market but investors don't have to buy round lots. A lot can be any number of shares. An odd lot is the term used when fewer than 100 shares are bought.
Is it worth buying 1 or 2 shares of stock? ›
Is it worth buying one share of stock? Absolutely. In fact, with the emergence of commission-free stock trading, it's quite feasible to buy a single share. Several times in recent months, I've bought a single share of stock to add to a position simply because I had a small amount of cash in my brokerage account.
How many shares of 1 stock should you buy? ›
What is a good number of shares to buy? The number of shares you should buy depends on the price of the stock and how much money you are willing to invest. For example, if a stock is worth $10 and you have a $10,000 portfolio, a good number of shares would be between 20 to 100 depending on your risk tolerance.
How much is one percent share? ›
Ex: You own 10,000 shares in a company which has 1,000,000 shares outstanding. You're a 1% owner.
