What Is a Stock — A Slice of a Company
If you buy one share of Samsung Electronics, what do you come to own of Samsung Electronics? The answer is "a very small slice."
A Stock = a Company Divided into Small Slices
A stock is a "unit" into which a corporation's capital has been finely divided. When founding a company, the money needed is gathered from many people, and in return they are given a token saying "this much is your share" — that is a stock.
So owning a stock means "owning a portion of the company" equal to the amount you hold out of all the shares the company has issued.
For example, if a company issued 100 shares and you own 1 share, you are an owner of one hundredth of that company.
A stock = a security representing an ownership stake (proportion of ownership) contributed to a company. (Source: Wikipedia, "Stock")
The Three Rights a Shareholder Holds
A person who holds a stock is called a shareholder, and shareholders have three main rights.
First, ownership stake — the proportion of the company you own, equal to the number of shares you hold. This proportion determines the size of the other rights.
Second, voting rights — the right to vote on important company decisions at the shareholders' meeting. In principle it is "one vote per share," so the more you own, the louder your voice.
Third, dividends — money the company distributes to shareholders from part of the profit it has earned. When the company decides on a dividend, you receive it in proportion to your stake.
Under the principle of shareholder equality, voting rights are in principle one vote per share. (Source: Wikipedia, "Voting rights")
How Do Shareholders Make Money?
There are two main sources of a shareholder's returns.
One is dividends. If a company steadily earns profits and distributes some of them, you can receive cash while you hold the stock.
The other is capital gains. If the company grows and its value rises, the stock price rises too, and if you sell it for more than you paid, you keep the gain.
For reference, not all stocks are the same. There are also classes of shares, such as "preferred stock," which have no voting rights but receive dividends first.
The Risks of Owning a Slice of a Company
Owning a slice of a company is not only for the good times. When a company struggles, the stock price falls sharply, and in the worst case, if the company goes bankrupt, the stock's value can become zero.
Individual stocks fluctuate far more than the market as a whole. Historically, even the stock prices of blue-chip companies have fallen more than half (-50%) and then recovered in many cases.
So rather than "betting everything on one company," diversification by spreading across many companies and assets is important. The next concepts, funds and ETFs, are the tools that make that diversification easy.
This article does not solicit the purchase of any specific stock. Note that the drawdown of an individual stock can be larger than that of the market as a whole.
Frequently Asked Questions
Q. Do I become a shareholder even if I buy just 1 share?
Yes, buying even a single share makes you a shareholder of that company. Your stake is just very small; rights like voting and dividends are, in principle, given equally in proportion to the number of shares you hold.
Q. Do I always receive dividends?
No. Dividends are paid only when a company earns profits and "decides to distribute them." Many companies pay almost no dividends because they reinvest for growth. Even without dividends, the approach is to expect returns from a rise in the stock price.
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