What are stocks?

Read time:

6–9 minutes

When you purchase a company’s stock, you purchase a teensy piece of a company. If you own a share of a company’s stock, you own a teensy weensy bit of that company.

Throughout this article, you will read the word ‘Stock’ and ‘Share’ often. When you buy a company’s stock, you can purchase 1 share, 2 shares, 1,000 shares – however many you’d like to purchase. Shares are, essentially, pieces of company stock.

A stock’s price depends on many factors, but mostly how much people are willing to pay for it! People are willing to pay more for a share of that stock if they think the company is doing well, because if the company grows, more people will want to purchase that stock. This will start making more sense as we walk through an example.

BigCorp is a massive software company that “went public” last year. That means BigCorp started selling stock in their company to the general public. Consumers can buy shares of publicly traded companies.

Estrella is interested in investing, so she checks her favorite brokerage website to see how much money it would cost to buy some BigCorp stock. This is what she sees:

BigCorp

BGCP

$22.50 | +$0.23 | +1.02%

Bid Ask

22.50 22.51

High Low

22.50 18.72

Estrella bursts into tears and closes her laptop, vowing to never again look at the stock market. (Estrella is me 10 years ago)

Fear not Estrella! This is not as scary as it looks. Let’s break it down. First, we see the company name at the top. Easy enough so far.

BigCorp

BGCP

$22.50 | +$0.23 | +1.02%

Bid Ask

22.50 22.51

High Low

22.50 18.72

Now look just below the company name. Do you see those 4 letters in all caps? That’s called a “Stock Ticker” or “Symbol”, and it’s essentially a nickname for the stock.

In this case, BigCorp has decided to forgo some letters and shorten to BGCP. Stock tickers are usually a shortened version of the company name, but sometimes companies go wild and off script. If you can’t find one, just do a quick search for “*insert company name* stock ticker” and it should come up. My favorite website for a quick lookup is Yahoo Finance.

BigCorp

BGCP

$22.50 | +$0.23 | +1.02%

Bid Ask

22.50 22.51

High Low

22.50 18.72

Well that wasn’t so bad… but now we’re entering number territory. There’s no need to worry, though. The line below the stock ticker is just giving us information about the stock price. BigCorp stock is currently $22.50, meaning that if you want to buy 1 share, it will cost $22.50!

The other numbers show how much the price has changed. Those numbers can be positive or negative depending on whether or not the price has increased or decreased. Luckily for BigCorp, their stock price has increased by $0.23! That is a 1.02% increase, which is pretty great. It looks like BigCorp is doing well.

BigCorp

BGCP

$22.50 | +$0.23 | +1.02%

Bid Ask

22.50 22.51

High Low

22.50 18.72

Now let’s talk about what ‘Bid’ and ‘Ask’ mean.

Have you ever been to an auction (or seen one in a movie)? People in the audience place bids on an item for however much they are willing to pay for that item. Stocks work the same way.

When people buy shares of company stock, they are placing a ‘Bid’. You could go crazy and bid for a different amount than the $22.50 stock price, but your order may not go through! That, my friends, is because of the next number: the ‘Ask’.

If the auctioneer is selling a beautiful piece of artwork they know is worth good money, they’ll throw out a starting price. Much like art, people who want to sell their stock will choose an ‘Ask’ price they’d like to sell it for. They’ll then place an order to sell their shares at that price.

Estrella can look at the ‘Bid’ and ‘Ask’ price to get an idea of what the stock price range is. The Bid price and the Ask price are usually very similar.

BigCorp

BGCP

$22.50 | +$0.23 | +1.02%

Bid Ask

22.50 22.51

High Low

22.50 18.72

The last piece we’ll look at is the “High” and the “Low”. Those numbers are pretty straight forward – the “High” is the highest the stock’s price has been in the past 52 weeks. In this case, today is the highest the price has been!

The “Low” is the lowest the stock’s price has been in the past 52 weeks. We can see here that the stock was $18.72. It’s increased a lot since then.

BigCorp

BGCP

$22.50 | +$0.23 | +1.02%

Bid Ask

22.50 22.51

High Low

22.50 18.72

With this information, Estrella decides to place an “Order”. You can’t buy a Stock immediately like you would on Amazon. In order to purchase a Share of a company, someone else has to sell a Share.

Estrella sees that the Bid and Ask price are very similar (just one cent apart!) so she places an order to buy 5 Shares of BigCorp stock at $22.50 each. She’ll need to wait a minute or so for the trade to go through. During that time, she is matched with someone who wants to sell Shares at a price of $22.50.

Estrella gets a notification that her Order has gone through, and she checks the Home Page. This is what she sees:

Symbol	Name	Quantity	Price	Market Value
BGCP	BigCorp	5	$22.50	$112.50

How exciting! Estrella now owns 5 Shares of BigCorp. The price of each Share was $22.50, meaning the total “Market Value” of her Stock is $112.50.

Price x Quantity = Market Value

$22.50 x 5 = $112.50

Let’s say a year from now Estrella wants to sell her BigCorp stock. She checks to see what the current price is and how much money she would make if she sold her 5 shares.

Symbol	Name	Quantity	Price	Market Value
BGCP	BigCorp	5	$27.65	$138.25

The price of each stock has gone up, so the market value of her 5 shares has gone up. If she sells the stock she will make $25.75.

$138.25 – $112.50 = $25.75

That’s a great return! $25.75 per year may not seem like a lot, but it can snowball quickly. Let’s look at what would have happened if she had bought 50 shares and the price had gone up the same amount.

Symbol	Name	Quantity	Price	Market Value
BGCP	BigCorp	50	$22.50	$1,125.00

1 year later…

Symbol	Name	Quantity	Price	Market Value
BGCP	BigCorp	50	$27.65	$1,382.50

$1,382.50 – $1,125.00 = $257.50

Now remember, stock prices can go down as well. Usually, it’s not wise to sell stock when it has decreased below what you paid for it. I know it can be stressful to look at those negative numbers, but many times – especially if you’re choosing low risk investments – those stocks prices will go back up.

If the possibility of losing money stresses you out too much, you may have a low risk tolerance. In that case, it may be a good idea to purchase lower-risk investments like bonds or ETFs.

Okay, we’ve discussed a lot. Let’s review.

A stock is a tiny piece of a company. If you own a company’s stock, you own a tiny piece of that company
In order to buy a share of a company, that company must be “publicly traded”
The ‘Stock Ticker’ or ‘Symbol’ is usually a shortened version of the Company’s name
Stock prices change based on many things, but mostly based on how much people want that stock.
The ‘Bid’ price is the amount buyers are willing to pay for 1 share of the stock
The ‘Ask’ price is the amount sellers are hoping to receive for 1 share of the stock
The ‘High’ and ‘Low’ numbers show us the highest the price has been and the lowest it has been in the past 52 weeks.
In order to buy or sell shares, you have to place an order. These orders don’t go through right away, because in order to purchase those shares, someone has to be selling shares at the price you bid. The vice versa is true for selling shares. Someone must be willing to pay the ask price you ordered for your sell order to go through.
The ‘Market Value’ of your stock is how much your shares are currently worth.
When the stock price increases, your market value increases. If you sell your shares when the market value is higher, you will make money!
However, if you sell your shares when the market value is lower than what you originally paid, you will lose money.
Depending on your risk tolerance, you may want to purchase bonds or ETFs instead of stocks

On the whole, stock, the stock market, and investing can be overwhelming. If you have any questions, feel free to reach out via our contact page.

References:

Yahoo Finance. https://www.finance.yahoo.com

Hayes, A. (May 13, 2024). Stocks: What They Are, Main Types, How They Differ From Bonds. Investopedia. https://www.investopedia.com/terms/s/stock.asp

Napoletano, E. (July 30, 2024). What Are Stocks? How Do They Work?. Forbes Advisor. https://www.forbes.com/advisor/investing/what-are-stocks/