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In the investing world, there may be no question more basic than this: "What's a stock?" Yet many people don't know the answer.
A share of stock represents actual ownership in a company. Consider this very simplified example: Imagine that Home Surgery Kits, Inc. (Ticker: OUCHH) has 10,000 shares outstanding (in existence). Now suppose that you own 100 shares of OUCHH. Divide 10,000 by 100, and you'll get 100, which means that you own 1/100 of the company, or 1%.
Of course, companies almost always have way more than 10,000 shares outstanding. Last time we checked, Motley Fool Inside Value recommendations Microsoft (NASDAQ:MSFT) and Coca-Cola (NYSE:KO) had 9.38 billion and 2.33 billion shares outstanding, respectively.
Ownership entitles you to a share in the company's earnings. These are sometimes partially paid out to shareholders in the form of dividends. Instead of dividends, or in addition to them, earnings may also be reinvested into the company, to fuel growth and generate more value.
With most shares of common stock, ownership is accompanied by voting rights. That's right -- when a company you hold shares in has a big decision to make, it will ask you what you think.
Individual investors typically buy "common stock" in a company. Another form of stock is "preferred," which usually carries some extra conditions and often excludes voting rights.
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Joe Magyer updated this article, which was originally written by Selena Maranjian. Joe does not own shares of any companies mentioned. The Motley Fool has a disclosure policy.
