What is a stock and how do you make money from it: explained for beginners

What it means to own a stock

A company splits its ownership into equal pieces called shares. When you buy a share, you become one of the company's owners. Your part is small, but it is real: you are entitled to a slice of the profit it pays out and you can vote at the shareholders' meeting.

Shares in large companies are bought and sold on a stock exchange, such as the New York Stock Exchange or the London Stock Exchange. You don't buy them from the company itself, but from other investors, through a broker.

If the company has 1,000,000 shares and you buy 100, you own 0.01% of it. Out of every dollar of profit paid to shareholders, one ten-thousandth is yours.

The first way to make money: dividends

When a company makes a profit, it can keep it to grow or pay part of it to shareholders. The part it pays out is called a dividend. It is usually paid once or several times a year, in cash, straight into your broker account.

Not every company pays dividends. Fast-growing companies usually prefer to reinvest their profit. To receive a dividend, you need to own the share before the ex-dividend date. Everything about this is in the guide to dividends.

The second way to make money: a rising price

If the business does well and its profit grows, more investors want to buy the share and its price rises. When you sell for more than you paid, the difference is your capital gain.

The gain only exists on paper while you keep the share. It becomes real, and taxable, when you sell. Dividends plus price growth together make up your total return.

Why a stock price goes up and down

In the short term, the price moves with supply and demand: news, quarterly results, interest rates, fear or excitement. In the long term, what matters most is how much profit the company makes. If profit grows year after year, the price usually grows too.

• Financial results: profit above expectations usually pushes the price up.
• Interest rates: when rates rise, stocks generally become less attractive.
• The economy: in a recession, many companies sell less.
• Market mood: fear and greed can move a price a lot, even without a real reason.

To tell whether a stock is expensive or cheap, you compare its price with the company's profit, for example with the P/E ratio. For now, it is enough to know that today's price alone doesn't tell you whether a stock is worth buying.

What you risk when you buy stocks

The simplest way not to depend on one company is diversification: you buy several stocks or an ETF, which holds hundreds of companies. Risk is covered in detail in the guide to risk.

How to buy your first stock

1. Open an account with a brokerChoose a regulated broker and sign up online with your ID.
2. Add money to your accountBy bank transfer or card.
3. Find the stockBy the company name or its ticker symbol, for example AAPL for Apple.
4. Place a buy orderChoose how many shares you want and at what price, then confirm.

Each step is explained, with examples, in the guide to buying your first stock.