What is a stock?

A stock — a share, in British usage — is a fraction of ownership in a company. Own one share of a company that has issued a million, and one millionth of the business is yours: one millionth of its profits, its assets, and its problems. Everything else about stocks is detail resting on that one idea.

Where shares come from

A company sells its shares once. In this primary market — a flotation, or a later fund-raising — the buyer's money goes to the company, which spends it on whatever it raised the money for. Every trade after that happens in the secondary market: one investor selling to another. The company receives nothing from these trades and is not consulted. Buy a share on an exchange and your money goes to whoever sold it, not to the business.

What the quoted price actually is

The number on the screen is not an official valuation. It is the price of the most recent trade two strangers agreed on — nothing more. Hypothetically, a share quoted at 50 means someone just paid 50 for it. No committee sets the figure and no ledger certifies it. The next trade can settle at whatever a willing buyer and a willing seller agree.

Why the price moves

Prices move when expectations change. Today's price reflects, roughly, what buyers collectively expect the business to earn and pay out in future. New information — results, rumours, a rival's product, a shift in interest rates — changes those expectations, and the price follows. A company can perform well while its share price falls, if it performs merely well when the market expected brilliance. The price tracks expectations, not effort.

What owning a share entitles you to

Three things, broadly. A vote at shareholder meetings, in proportion to your holding. A slice of any dividend the board declares — declared being the load-bearing word, since boards can also decline to pay, as how dividends work explains. And a residual claim: if the company is wound up, shareholders receive whatever remains after every lender, supplier and tax authority has been paid. Residual means last in the queue, and the queue often exhausts the money before reaching you.

The floor under your losses

Limited liability means the most you can lose is what you paid. If a company you part-own collapses owing billions, nobody knocks on your door for a contribution. Purely hypothetical arithmetic: pay 40 for a share and watch the company fail, and you lose 40 — not 40 plus your share of its debts. The value can reach zero; it cannot go below it.

What this article does not claim to know

Whether shares in general, or any share in particular, will make you money. Returns arrive by two mechanical routes — selling for more than you paid, and dividends along the way — and how people make money from investments walks through both. Whether either route pays off for a given company, and when, is precisely what nobody can state in advance, this publication included.