Stock

Definition

In business and finance, a stock refers to a type of financial instrument that represents ownership in a business and constitutes a claim on part of the company’s assets and earnings.

What is a stock?

When an individual purchases stocks, they are essentially buying a share of ownership in the issuing company. This ownership stake is also known as equity.

Stocks are typically issued by publicly traded companies that have decided to raise capital by selling ownership stakes to the public. However, some stocks can also be issued by private companies in certain circumstances.

There are different types of stocks, including:

1. Common stocks: Represent ownership with voting rights in the company.
2. Preferred stocks: Carry certain privileges, such as priority in receiving dividends, but often lack voting rights.

Investors can profit from stocks through capital gains. Capital gains occur when the market value of a stock increases, allowing investors to sell the stock at a higher price than the purchase price.

Investing in stocks carries risks, including market fluctuations and the potential for loss of capital. Stock prices can be volatile, influenced by various factors, including economic conditions, company performance, and market sentiment.

Stocks are often considered as long-term investments, allowing investors to benefit from the potential growth of the company over time.

Example of a stock

ABC Corp is a publicly traded company and manufactures and sells smartphones and other consumer electronics.

As of today, ABC Corp’s stock is trading at £100 per share.

Investors can purchase shares of ABC Corp by placing buy orders through their brokerage accounts.  For example, if an investor purchases 100 shares of ABC Corp at £100 per share, they would spend a total of £10,000. If ABC Corp’s stock price increases to £120 per share, the investor’s investment would be worth £12,000, resulting in a £2,000 capital gain.

Conversely, if the stock price decreases to £80 per share, the investor’s investment would be worth £8,000, resulting in a £2,000 capital loss.