Stocks
When you buy a stock, you own a tiny piece of a company. If the company does well, your piece becomes more valuable. If it does poorly, your piece loses value.
What Is a Stock?
A stock (also called a "share" or "equity") represents partial ownership in a company. When a company wants to raise money, it can sell pieces of itself to investors.
Simple example:
If a company is divided into 1,000,000 shares and you own 100 shares, you own 0.01% of that company. You are entitled to 0.01% of its profits (if it pays dividends) and 0.01% of what is left if the company is sold.
How Stocks Make Money
The stock price goes up because the company becomes more valuable. You sell for more than you paid. This is the main way most people make money in stocks.
Some companies share profits with shareholders regularly. You get cash payments just for owning the stock. Not all companies pay dividends.
How Stocks Lose Money
If the company does poorly, or if investors lose confidence, the stock price drops. If you sell when the price is lower than what you paid, you lose money.
Important: You only actually lose money if you sell. If you hold through a downturn and the price recovers, you have not lost anything.
Risk Level: High
Stocks are considered higher risk because prices can change dramatically:
Individual stocks can lose 50%+ of their value in a bad year
Companies can go bankrupt, making shares worthless
Prices move based on news, earnings, and market sentiment — often unpredictably
Short-term, stocks are volatile; long-term (10+ years), they have historically grown
Why People Still Invest in Stocks
Despite the risk, stocks have historically been one of the best ways to build wealth over long periods:
The US stock market has returned about 10% per year on average over the last 100 years
Stocks have outperformed bonds, savings accounts, and most other investments long-term
Owning stocks means your money grows with the economy, not just inflation
Diversifying across many stocks (via index funds) reduces individual company risk
What Stocks Are Not
Not a get-rich-quick scheme
Day trading and stock picking rarely beats simple index investing. Most people who try to time the market lose money.
Not gambling (if done right)
Buying a diversified portfolio and holding for decades is investing. Buying meme stocks hoping they will moon is closer to gambling.
Not the only way to invest
A good portfolio usually includes bonds and other investments too, especially as you get closer to needing the money.
Key Takeaway
Stocks offer the potential for high returns but come with real risk. The best approach for most people: invest in diversified index funds, do not try to pick individual winners, and hold for the long term. Time in the market beats timing the market.