What is Stock?

A share of common stock equals a share of the ownership, or equity, in a corporation.

A share of common stock equals a share of the ownership, or equity, in a corporation. The corporation sells shares of ownership to the  public to raise money. With an IPO, an initial public offering, a privately held company will decide to sell shares in the company to raise money.  That money may be reinvested in the company or the owners may want a way to get some of their money out of the company.

Once it is a public company, it will be traded on one of the exchanges in the stock market . The stock market represents a secondary market where sellers and buyers can get together, although you never ever see whom you are buying your stocks from.

Stock usually sell in round lots of 100. You no longer get certificates when you buy stocks, but your purchase is registered with your brokerage firm and is held in "street name". You can buy stocks through a stock broker, and depending on your sophistication level, you can se up online trading through many discount brokers out there.

The price of a stock reflects its value in the market, what a buyer is willing to pay a seller. Prices are also affected by supply and demand. A stock may be undervalued due to a problem with earnings or sales. It may be overvalued because the market is expecting great things from it.

Stock reward you in two way. You may get a dividend, which is the way a company shares its profit with it shareholders, or the price of a stock may appreciate and you can sell it for a profit. If you hold the stock for a year or longer, it is considered a long-term capital gain and is taxed at a maximum of 20 percent. If held for under a year, when you sell, it is taxed as ordinary income.