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 -2.07%) and Coca-Cola (KO -1.02%) 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 -1.34%)(GOOG -1.5%) 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 -2.42%). 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
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 a share of stock represent? ›
A stock represents a share in the ownership of a company, including a claim on the company's earnings and assets. As such, stockholders are partial owners of the company. Fractional shares of stock also represent ownership of a company, but at a size smaller than a full share of common stock. Preferred stock.
What does "1 share" mean? ›
A share is a piece of a company limited by shares. Each piece represents a certain percentage of the company. Anyone who owns shares in a limited company is called a 'shareholder' or 'member'. The number of shares held by each member determines how much of the company they own and control.
What does it mean to own a share of stock? ›
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.
Is it worth buying one share of a stock? ›
Purchasing single shares is worth it if it aligns with your investment strategy and goals. It can be a great starting place for beginners looking to find their feet in the stock market, and buying single shares can soon be compounded into a sizeable position through dollar-cost averaging.
How much is 1 share price? ›
A share price – or a stock price – is the amount it would cost to buy one share in a company. The price of a share is not fixed, but fluctuates according to market conditions.
What is difference between a stock and a share? ›
A stock is an equity instrument issued by a corporation that represents ownership of that company. A share is one unit of that ownership. You would say "I own 10 shares of Apple stock" for example.
What are shares for dummies? ›
The basic principle of stock market shares explained
Put simply a share is a slice of ownership of a company, articulated as a financial value. Let's say for example a company is valued at £50 million and there are 25 million shares, then each share is worth £2.
What is the definition of a share in stocks? ›
In financial markets, a share (sometimes referred to as stock or equity) is a unit of equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers to all of the shares of an enterprise.
How do you calculate one share of stock? ›
How is the stock price determined? When a company enters the market, it undergoes valuation during an initial public offering (IPO). After this event, the total value of the company is determined. Dividing this total value by the number of issued stocks gives you the price of a single share.
The more equities you hold in your portfolio, the lower your unsystematic risk exposure. A portfolio of 10 or more stocks, particularly across various sectors or industries, is much less risky than a portfolio of only two stocks.
What is a single share of stock? ›
A share is the single smallest denomination of a company's stock. So if you're divvying up stock and referring to specific characteristics, the proper word to use is shares. Technically speaking, shares represent units of stock. Common and preferred refer to different classes of a company's stock.
What happens when you buy a share of stock? ›
If you buy a company's stock, you become a part owner and you'll generally make money if the company does well—or lose money if it doesn't. Depending on how established the company is, most of the money you make will come either through increases in share price or through dividend payments.
When a person owns shares of stock what they actually own is? ›
A share is a unit of ownership delivered by a capital company. In most cases, it is a commercial company with a limited liability. Holding one of several shares – in other words, being a shareholder – means that you own a part of the company's capital but you are not held personally liable for the company's debts.
What happens when you own one share of stock? ›
Yes, owning a single share of stock entitles you to the rights of all shareholders. Some companies restrict certain rights—such as the right to examine minutes of board meetings—to shareholders of minimum holdings or minimum time periods.
Can 1 share of stock make you money? ›
How much can you make off of a share of stock? The average stock market return is around 7-10% annually, after adjusting for inflation. Therefore, the gain on a single share depends on its purchase price and market performance. For instance, a $100 share might earn $7 to $10 per year on average.
What is 100 shares of stock called? ›
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.
Is having 100 shares a lot? ›
Stocks are most commonly sold in round lots, or lots of 100 shares or more. A lot of less than 100 shares is called an odd lot; odd lot transactions generally have greater commission costs associated with them. Financial professionals advise having enough money to buy a round lot of shares in one company.
Does 1 stock equal 100 shares? ›
No, one stock does not equal 100 shares. One stock represents ownership in a company, while shares are individual units of that stock. A stock can be divided into any number of shares.
