What Is a Stock?
Ownership, equity, and why companies go public · 12 min
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None — this is the starting point of the curriculum. Just curiosity and comfort with basic arithmetic.
Owning a Piece of a Business
Say a company needs money. Maybe it wants to build a factory, hire a hundred engineers, or open stores in a new country. It has two options: borrow the money, or sell off little pieces of itself to people willing to fund it. A stock is one of those pieces — a share of ownership in the company, no different in principle from owning a slice of a pizza you split with friends, except the pizza is a business and the slices can be bought and sold to strangers on the internet at 9:31am every weekday.
Apple has about 15.3 billion shares outstanding. Own 100 of them and you own roughly 0.0000007% of Apple — a number so small it's almost a joke, except it isn't. It's real ownership. When Apple earns $100 billion in a year, your 100 shares are legally entitled to their proportional cut, whether that shows up as a dividend check or as the company reinvesting it on your behalf and (hopefully) making your slice worth more.
Going Public
Every company starts private. A founder owns it, maybe some early employees and investors get a piece too, and that's the whole cap table. At some point, if the company wants a lot more money than a few investors can provide, it can sell shares to the entire public for the first time — an IPO, or Initial Public Offering.
Getting there involves investment banks (the underwriters), who help set the opening price, pitch the offering to big institutional investors, and get the stock listed on an exchange like the NYSE or NASDAQ. The company only actually receives cash from that first sale. Everything after — every trade you see on your phone — is investors buying and selling shares to each other in what's called the secondary market. The company doesn't see a cent of it.
A few IPOs worth knowing: Google went public in 2004 at $85 a share. Facebook in 2012 at $38. Airbnb in 2020 at $68. Each one was the moment a company's ownership stopped being a private arrangement and became something anyone with a brokerage account could buy.
Common vs. Preferred Stock
Not all shares are the same shape. What almost everyone buys is common stock. There's a second, less-talked-about kind called preferred stock that behaves more like a bond wearing a stock costume.
- One vote per share on things like electing the board or approving a merger
- Dividends if — and only if — the board decides to pay them
- Last in line if the company goes under, after creditors and preferred holders. Often nothing left at all
- Usually no vote at all
- A fixed dividend, paid before common holders see anything
- Ahead of common stock in a liquidation — but still behind debt
- Capped upside: doesn't get much richer even if the company takes off
Think of it as a spectrum with bonds on one end and common stock on the other. Preferred sits in the middle: you give up the chance at a big win in exchange for getting paid first and more reliably.
How Stock Prices Are Set
There's no formula that spits out "the" price of a stock. It's whatever a willing buyer and a willing seller agree on, right now, on an exchange. That's it. That's the whole mechanism.
What keeps that from being totally random is that both sides are trying to guess the same thing: what the company's future cash is worth today. A stock at $100 with $5 of annual earnings per share has a P/E ratio of 20 — investors are effectively paying 20 years of today's earnings up front, betting the company grows into that price. We'll spend a full lesson on valuation later (Lesson 4), but it's worth planting now: price and value are not the same question.
Market Capitalization
The simplest number for "how big is this company" is market capitalization, or market cap — just share price times shares outstanding.
Market Cap = Share Price × Shares Outstanding
It's the market's current, collective, constantly-changing opinion of what the whole business is worth. Companies get bucketed by size:
- Mega-cap: $200B+ — Apple, Microsoft, Nvidia
- Large-cap: $10B–$200B — Walmart, Nike
- Mid-cap: $2B–$10B
- Small-cap: $300M–$2B
- Micro-cap: under $300M
One thing market cap doesn't capture: debt. For that you want enterprise value, which adds debt back in and subtracts cash — closer to what it'd actually cost to buy the whole company outright. More on that in Lesson 4 too.
Why Does the Stock Price Change?
Every price move is the market updating its guess about future cash flows. An earnings beat, a new product, a CEO stepping down, an inflation report, a surprise rate hike — none of these change what the company owns today, but all of them change what people expect it to earn tomorrow, and the price moves to match.
What's genuinely surprising is how fast this happens. Professional trading firms run supercomputers and, in some cases, literally rent satellite time to count cars in Walmart parking lots before earnings season. By the time you read a headline, the price has usually already moved. That's the honest reason beating the market consistently is so hard: the price you're looking at already has almost everything knowable baked into it.