What Is a Stock?

A stock is a unit of ownership in a corporation. If you own a share, you own a small fraction of the company: a claim on part of its future profits and on part of whatever is left over if it is ever wound up, plus (usually) a vote on certain decisions.

In short: a share of stock is a residual claim. Lenders, suppliers, employees, and tax authorities get paid first. Shareholders own what remains. That is why stocks can rise a lot when a business does well, and why they can fall to zero when it doesn’t. Your loss, though, is capped at what you paid, because shareholders have limited liability.

People use “stock,” “shares,” and “equity” almost interchangeably. Strictly, “stock” is the ownership in general and a “share” is one unit of it, but in everyday use the words mean the same thing.

What you actually own

A common misconception is that owning a share means owning a piece of the company’s buildings, inventory, or cash. You don’t. The corporation is a separate legal person, and it owns its assets. What you own is a bundle of rights against that corporation:

• A claim on earnings. Profits belong to the shareholders as a group. The board of directors decides how much to pay out as dividends and how much to keep and reinvest. Either way, the profit belongs to the owners. Kept profits show up as retained earnings and, ideally, a more valuable business.
• A claim on assets in a wind-up. If the company is dissolved or liquidated, shareholders get what is left after every creditor has been paid in full. Often that is nothing.
• Voting rights. Common shareholders typically elect the board and vote on major matters such as mergers. Some companies issue share classes with extra votes or no votes; see common vs preferred shares.
• The right to sell. Shares of public companies can be sold to other investors on a stock exchange, which is what makes them easy to buy and sell. How that works is covered in how the stock market works.

These rights come from corporate law and the company’s own governing documents. In the US, most large public companies are incorporated under state law, very often Delaware’s. In Canada, they are incorporated under the federal Canada Business Corporations Act or a provincial statute. The details differ, but the core idea is the same in both countries.

Limited liability

Limited liability is the feature that made mass share ownership possible. As a shareholder, you are not personally responsible for the company’s debts. If the company borrows $1 billion and goes bankrupt, the lenders can claim the company’s assets, but they cannot come after your house or savings. The most you can lose is the money you put into the shares.

Compare that with a general partnership, where each partner can be personally liable for the business’s obligations. Limited liability lets millions of people own small slices of a company without needing to monitor every decision it makes.

Shares outstanding and market capitalization

A company’s articles set how many shares it is authorized to issue. The number it has actually issued and that investors hold is the number of shares outstanding. Shares a company has bought back and kept are called treasury shares, and they don’t count as outstanding.

Shares outstanding matters because it tells you what fraction of the company each share represents. It is also how you get market capitalization, the market’s price tag for the whole company:

Market capitalization = share price × shares outstanding

The market cap glossary entry covers the variations (such as float-adjusted market cap, which index providers use).

A worked example: Maple Widgets Inc.

Maple Widgets Inc. is a hypothetical company with 50,000,000 shares outstanding. You own 500 shares.

Your ownership stake: 500 ÷ 50,000,000 = 0.00001, or 0.001% of the company.

Your share of the profits. Last year Maple Widgets earned net income of $20,000,000.

• Earnings per share (EPS) = $20,000,000 ÷ 50,000,000 = $0.40. (More in the earnings per share entry.)
• Your slice of the earnings: 500 × $0.40 = $200.

The board declares a dividend of $0.10 per share. You receive 500 × $0.10 = $50 in cash. The other $0.30 per share ($150 of “your” earnings) stays in the company to be reinvested. You don’t see that $150 directly, but you still own your share of it.

What the market says it’s worth. If the shares trade at $8.00:

• Market cap = $8.00 × 50,000,000 = $400,000,000.
• Your 500 shares are worth 500 × $8.00 = $4,000.
• The market is paying $8.00 ÷ $0.40 = 20 times last year’s earnings for each share.

A wind-up, two ways. Suppose Maple Widgets is liquidated.

• Case 1: the assets sell for $300,000,000 and the company owes $260,000,000. Creditors are paid first, leaving $40,000,000 for shareholders, or $40,000,000 ÷ 50,000,000 = $0.80 per share. You receive $400 for shares you may have paid $4,000 for.
• Case 2: the assets sell for $300,000,000 but the company owes $320,000,000. Creditors take everything and still lose $20,000,000. Shareholders get $0. Thanks to limited liability, you do not owe anything for the $20,000,000 shortfall.

Dilution. If Maple Widgets issues 10,000,000 new shares to raise money, there are now 60,000,000 shares. Your 500 shares are 500 ÷ 60,000,000 = 0.000833%, down from 0.001%. Whether that hurts you depends on what the company does with the money it raised. If it invests well, a smaller slice of a bigger business can be worth more.

How you hold shares today

Very few investors hold paper certificates now. When you buy shares through a brokerage account, they are usually held in street name: the central depository holds them on behalf of brokers, and your broker’s records show you as the owner. In the US the central depository is the Depository Trust Company, part of DTCC. In Canada it is CDS, part of TMX Group. You remain the beneficial owner, with the economic rights and (through your broker) the right to vote.

Public companies must disclose their finances regularly. In the US those filings sit on the SEC’s EDGAR database; in Canada, on SEDAR+. The annual report is the best place to see the share count, the debt that ranks ahead of shareholders, and the risks the company itself highlights.

Why companies issue stock at all

Selling shares is a way to raise money without borrowing. A company that sells stock does not have to pay it back or make fixed interest payments. In exchange, it gives up part of its ownership and future profits. Founders and early investors also use public listings to turn their private stakes into something they can sell. The first public sale is the subject of how IPOs work.

The trade-off between owning (stock) and lending (bonds) is central to how companies finance themselves, and it is covered in stocks vs bonds.

Where a share’s value comes from

If a share is a claim on profits, its value ultimately depends on how much cash the business will hand to its owners over its whole life, and how confident investors are about that. Shareholders get cash in three ways: dividends, buybacks (the company buying shares from those who want to sell), and, at the very end, a sale or liquidation of the company. Profits the company reinvests only create value if they lead to more cash for owners later.

That’s why the share price usually has little to do with the company’s book value, the accounting figure for assets minus liabilities. Say Maple Widgets reports shareholders’ equity of $150,000,000 on its balance sheet. That is $150,000,000 ÷ 50,000,000 = $3.00 of book value per share, yet the stock trades at $8.00, or $8.00 ÷ $3.00 = 2.67 times book. Investors are paying for expected future profits, not for the accounting value of what the company already owns. For some businesses (banks, for example) price and book value tend to stay fairly close. For software or brand-driven companies, they can be far apart.

None of this says what a stock should trade at. It explains why two people can look at the same company and disagree on its worth: they are estimating the future, and nobody knows it. How the market turns those disagreements into a single price is the subject of the next article in this series, on how stock prices are set.

What can go wrong

• You can lose everything you put in. Shareholders are last in line. If a company fails, the common shares are often worth nothing.
• Dividends are not promised. The board can cut or eliminate a dividend at any time. Bond interest is a contractual obligation; a dividend is not.
• Dilution. New share issues, stock options, and convertible securities can shrink your percentage ownership.
• Your vote may count for little. In dual-class companies, founders can hold most of the votes with a minority of the shares.
• Price and value can diverge. The market price reflects what other investors are willing to pay today, which can be far above or below what the business turns out to be worth.

The takeaway

A stock is a fractional, limited-liability ownership claim on a company: you share in what is left after everyone else is paid. That structure gives shareholders the upside when a business grows and caps the downside at the amount invested. Knowing the share count, the debts ahead of you, and how profits are divided is the starting point for understanding every other topic on this site.

Related: How the Stock Market Works · Common vs Preferred Shares · How Dividends Work · Stocks vs Bonds