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What Are Stocks? Definition, How They Work
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What Are Stocks? Definition, How They Work
Stocks are an investment in a company and that company's profits. Investors buy stock to earn a return on their investment.
Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
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19 years of experience Expertise Retirement planning investment management investment accountsArielle O’Shea leads the investing and taxes team at NerdWallet. She has covered personal finance and investing for nearly 20 years, and was a senior writer and spokesperson at NerdWallet before becoming an editor. Previously, she was a researcher and reporter for leading personal finance journalist and author Jean Chatzky, a role that included developing financial education programs, interviewing subject matter experts and helping to produce television and radio segments. Arielle has appeared on the "Today" show, NBC News and ABC's "World News Tonight," and has been quoted in national publications including The New York Times, MarketWatch and Bloomberg News. She is based in Charlottesville, Virginia.
Arielle O’Shea leads the investing and taxes team at NerdWallet. She has covered personal finance and investing for nearly 20 years, and was a senior writer and spokesperson at NerdWallet before becoming an editor. Previously, she was a researcher and reporter for leading personal finance journalist and author Jean Chatzky, a role that included developing financial education programs, interviewing subject matter experts and helping to produce television and radio segments. Arielle has appeared on the "Today" show, NBC News and ABC's "World News Tonight," and has been quoted in national publications including The New York Times, MarketWatch and Bloomberg News. She is based in Charlottesville, Virginia. Published in Head of Content, Investing & Taxes + more + more
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14 years of experience Expertise Small business finances investing bankingRobert Beaupre leads the SMB team at NerdWallet. He has covered financial topics as an editor for more than a decade. Before joining NerdWallet, he served as senior editorial manager of QuinStreet's insurance sites and managing editor of Insure.com. In addition, he served as an online media manager for the University of Nevada, Reno.
Robert Beaupre leads the SMB team at NerdWallet. He has covered financial topics as an editor for more than a decade. Before joining NerdWallet, he served as senior editorial manager of QuinStreet's insurance sites and managing editor of Insure.com. In addition, he served as an online media manager for the University of Nevada, Reno. Published in Head of Content, Small Business + more + moreStocks make a lot of headlines. But what exactly are they?
Stocks make a lot of headlines. But what exactly are they?If you buy stock in a company, that means you officially own part of that company. Yes, it may be a small sliver of ownership, but if the company performs well, makes money and becomes more valuable, your share of the company will also become more valuable. If that happens, you may be able to sell your stock for more than you bought it for. That's how stocks can help you build wealth.
If you buy stock in a company, that means you officially own part of that company. Yes, it may be a small sliver of ownership, but if the company performs well, makes money and becomes more valuable, your share of the company will also become more valuable. If that happens, you may be able to sell your stock for more than you bought it for. That's how stocks can help you build wealth.While there are some small differences, the terms "stocks" and "shares" generally mean the same thing — though it's probably more common to say you "own shares of" or "own stock in" a particular company, and you "own stocks" to refer to owning shares of lots of companies.
While there are some small differences, the terms "stocks" and "shares" generally mean the same thing — though it's probably more common to say you "own shares of" or "own stock in" a particular company, and you "own stocks" to refer to owning shares of lots of companies.Brokerage firms
Brokerage firms
Brokerage firmson Charles Schwab's website
on E*TRADE's website
on Vanguard's website
on Fidelity's website
How do stocks work?
How do stocks work?Stocks work like this: Companies sell shares of their business to investors. Investors buy those shares (called stock), which in turn provides companies with money to expand their businesses through creating new products, hiring more employees or other business initiatives.
Stocks work like this: Companies sell shares of their business to investors. Investors buy those shares (called stock), which in turn provides companies with money to expand their businesses through creating new products, hiring more employees or other business initiatives.Companies typically begin to issue shares of their stock through a process called an initial public offering (IPO). This is called "going public," and it refers to a company's debut on a stock exchange. Once a company’s stock is on the stock market after the IPO, it can be bought and sold among investors. If you decide to buy a stock, you’ll often buy it not from the company itself, but from another investor who wants to sell the stock. Likewise, if you want to sell a stock, you’ll sell to another investor who wants to buy.
Companies typically begin to issue shares of their stock through a process called an initial public offering (IPO) . This is called "going public," and it refers to a company's debut on a stock exchange. Once a company’s stock is on the stock market after the IPO, it can be bought and sold among investors. If you decide to buy a stock, you’ll often buy it not from the company itself, but from another investor who wants to sell the stock. Likewise, if you want to sell a stock, you’ll sell to another investor who wants to buy.These trades are handled through a stock exchange, with a broker representing each investor, who holds stocks and other investments in a brokerage account. The process of opening a brokerage account is similar to opening a bank account — you will need a brokerage account to buy stock.
These trades are handled through a stock exchange, with a broker representing each investor, who holds stocks and other investments in a brokerage account. The process of opening a brokerage account is similar to opening a bank account — you will need a brokerage account to buy stock.The way you make money from stocks is by selling them at a higher price than you paid for them. For instance, if you bought a share of Apple stock at $200 and sold it when it reached $300, you would have made $100 (minus any taxes you'd have to pay on the money you made).
The way you make money from stocks is by selling them at a higher price than you paid for them. For instance, if you bought a share of Apple stock at $200 and sold it when it reached $300, you would have made $100 (minus any taxes you'd have to pay on the money you made).How-to
One of the best ways for beginners to learn how to invest in stocks is to put money in an online investment account and purchase stocks from there. Our guide will walk you through how to find the stocks you want to invest in and how to place a trade.
One of the best ways for beginners to learn how to invest in stocks is to put money in an online investment account and purchase stocks from there. Our guide will walk you through how to find the stocks you want to invest in and how to place a trade.What are the benefits of owning stock?
What are the benefits of owning stock?The primary reason that investors own stock is to build long-term wealth by earning a return on their investment. That return generally comes in two possible ways:
The primary reason that investors own stock is to build long-term wealth by earning a return on their investment. That return generally comes in two possible ways:The stock’s price goes up. You can then sell the stock for a profit if you’d like.
The stock’s price goes up. The stock’s price goes up. You can then sell the stock for a profit if you’d like.The stock pays dividends. Not all stocks pay dividends, but many do, especially well-established companies. Dividends are payments made to shareholders out of the company’s revenue, and they’re typically paid quarterly. (Interested in dividend income? View our list of high-dividend stocks.)
The stock pays dividends. The stock pays dividends. Not all stocks pay dividends, but many do, especially well-established companies. Dividends are payments made to shareholders out of the company’s revenue, and they’re typically paid quarterly. (Interested in dividend income? View our list of high-dividend stocks .)Over the long term, the average annual stock market return is 10%; that average falls to between 7% and 8% after adjusting for inflation. That means $1,000 invested in stocks 30 years ago could be worth nearly $8,000 today.
Over the long term, the average annual stock market return is 10%; that average falls to between 7% and 8% after adjusting for inflation. That means $1,000 invested in stocks 30 years ago could be worth nearly $8,000 today.It’s important to note that the historical return is an average across all stocks in the S&P 500, a collection of around 500 of the biggest companies in the U.S. It doesn’t mean that every stock posted that kind of return — some posted much less or even failed completely. Others posted much higher returns.
It’s important to note that the historical return is an average across all stocks in the S&P 500, a collection of around 500 of the biggest companies in the U.S. It doesn’t mean that every stock posted that kind of return — some posted much less or even failed completely. Others posted much higher returns.That’s why it’s wise to buy stock not in just one company, but to build a well-rounded portfolio that includes stocks in many companies across various industries and geographies.
That’s why it’s wise to buy stock not in just one company, but to build a well-rounded portfolio that includes stocks in many companies across various industries and geographies.Learn more
You can't directly invest in the S&P 500, but you can invest in an index fund or exchange-traded fund that tracks the index.
You can't directly invest in the S&P 500, but you can invest in an index fund or exchange-traded fund that tracks the index.Key things to know about stocks
Key things to know about stocksCommon stocks vs. preferred stocks
Common stocks vs. preferred stocksThere are two main types of stocks: common and preferred. The primary differences between common stock and preferred stock are the dividends and voting rights they offer. Most investors own common stock in a public company. Common stock may pay dividends, but dividends are not guaranteed, and the amount of the dividend is not fixed. Investors of common stock typically have voting rights that are proportional to their ownership level.
There are two main types of stocks: common and preferred. The primary differences between common stock and preferred stock are the dividends and voting rights they offer. Most investors own common stock in a public company. Common stock may pay dividends, but dividends are not guaranteed, and the amount of the dividend is not fixed. Investors of common stock typically have voting rights that are proportional to their ownership level.Preferred stocks typically pay fixed dividends, so owners can count on a set amount of income from the stock each year. Owners of preferred stock also stand at the front of the line when it comes to the company’s earnings: Excess cash distributed by dividend is paid to preferred shareholders first, and if the company goes bankrupt, preferred-stock owners receive any liquidation of assets before common-stock owners. Owners of preferred stock usually do not have voting rights.
Preferred stocks typically pay fixed dividends, so owners can count on a set amount of income from the stock each year. Owners of preferred stock also stand at the front of the line when it comes to the company’s earnings: Excess cash distributed by dividend is paid to preferred shareholders first, and if the company goes bankrupt, preferred-stock owners receive any liquidation of assets before common-stock owners. Owners of preferred stock usually do not have voting rights. U.S. Securities and Exchange Commission. Stocks. Accessed May 9, 2022.» Read our full explainer on the types of stocks for more details
» » Read our full explainer on the types of stocks for more detailsTrading vs. investing
Trading vs. investingTraders buy and sell stocks to get a short-term profit — they're looking to capitalize on small changes in a stock's share price, and their goal is to time the market. Investors buy and hold stocks, and usually do better over the long term. Investors typically own a diversified portfolio of many stocks and hold on to them through good economic times and bad. They generally don't try to time the market; instead, they often invest small amounts on a regular basis.
Traders buy and sell stocks to get a short-term profit — they're looking to capitalize on small changes in a stock's share price, and their goal is to time the market. Investors buy and hold stocks, and usually do better over the long term. Investors typically own a diversified portfolio of many stocks and hold on to them through good economic times and bad. They generally don't try to time the market; instead, they often invest small amounts on a regular basis.Individual stocks vs. funds
Individual stocks vs. fundsInvesting in individual stocks takes time. You should research each stock you purchase, which includes a deep dive into the bones of the company and its financials. Many investors opt to save time by investing in stocks through equity mutual funds, index funds and ETFs instead. These allow you to purchase many stocks in a single transaction, offering instant diversification and reducing the amount of legwork it takes to invest.
Investing in individual stocks takes time. You should research each stock you purchase, which includes a deep dive into the bones of the company and its financials. Many investors opt to save time by investing in stocks through equity mutual funds, index funds and ETFs instead. These allow you to purchase many stocks in a single transaction, offering instant diversification and reducing the amount of legwork it takes to invest.Next Step
The stock brokers that made our list don't charge any commissions to trade stocks. They're also well-rounded brokers with responsive customer service and user-friendly trading platforms and apps.
The stock brokers that made our list don't charge any commissions to trade stocks. They're also well-rounded brokers with responsive customer service and user-friendly trading platforms and apps.Am I really part of the company if I own company stock?
Am I really part of the company if I own company stock?Most investors own what’s called common stock, which is what is described above. Common stock comes with voting rights — you'll likely have the chance to cast your vote regarding major changes the company wants to make. However, unless you own a substantial number of shares, your vote doesn't actually carry significant weight.
Most investors own what’s called common stock, which is what is described above. Common stock comes with voting rights — you'll likely have the chance to cast your vote regarding major changes the company wants to make. However, unless you own a substantial number of shares, your vote doesn't actually carry significant weight.Again, owning a stock doesn’t mean you carry a lot of weight within the company, or that you get to rub elbows with company bigwigs. It also doesn’t mean that you own a piece of the company’s assets — you aren’t entitled to a parking spot in the company lot or a desk at the company’s headquarters.
Again, owning a stock doesn’t mean you carry a lot of weight within the company, or that you get to rub elbows with company bigwigs. It also doesn’t mean that you own a piece of the company’s assets — you aren’t entitled to a parking spot in the company lot or a desk at the company’s headquarters.What you own, essentially, is a share in the company’s profits — and, it should be said, its losses. The goal, of course, is for the value of the company — and as a result, the value of its stock — to go up while you’re a shareholder.
What you own, essentially, is a share in the company’s profits — and, it should be said, its losses. The goal, of course, is for the value of the company — and as a result, the value of its stock — to go up while you’re a shareholder.But while stocks overall have a history of high returns, they also come with risk: It’s entirely possible that a stock you own will go down in value instead, especially in the short term. Stock prices fluctuate for a variety of reasons, from overall market volatility to company-specific events, like a communications crisis or a product recall.
But while stocks overall have a history of high returns, they also come with risk: It’s entirely possible that a stock you own will go down in value instead, especially in the short term. Stock prices fluctuate for a variety of reasons, from overall market volatility to company-specific events, like a communications crisis or a product recall.Many long-term investors hold on to stocks for years, without frequent buying or selling, and while they see those stocks fluctuate over time, their overall portfolio goes up in value over the long term.
Many long-term investors hold on to stocks for years, without frequent buying or selling, and while they see those stocks fluctuate over time, their overall portfolio goes up in value over the long term.» Dive deeper: Should you invest in stocks or mutual funds?
» Dive deeper: » Dive deeper: Should you invest in stocks or mutual funds?Helpful resources
Helpful resources How to Start Investing in Stocks What Is the Average Stock Market Return? How to Make Money in Stocks in 2026: 6 Easy Steps How to sell stock: A 3-step guide for beginners More like this Investment Basics Investing Stocks Investment Calculator Use our free investment return calculator to estimate how your money can grow. Enter your planned contributions, timeline, rate of return and compounding frequency to get started. Chris Davis Best Investments: Where to Invest in 2026 Wondering where to invest your money this year? High-yield savings accounts, CDs, bonds, funds and stocks are all considered among the best investments available. Learn more about the risks, potential returns and how to get started. 2 By Chris Davis, Alieza Durana The Best-Performing Stocks in 2026 (By One-Year Returns) These are the best 21 stocks in the S&P 500 right now, based on 1-year performance. 2 By Arielle O'Shea, Chris Davis Investing in Dividend Stocks: Guide, Calculator and Top 7 Yields for June 2026 Dividend stocks can be a great choice for investors looking for passive income and portfolio stability. Here's what to look for when evaluating dividend stocks and how to invest in them. 2 By Chris Davis, Sam Taube What Is a Brokerage Account? Where and How to Open One Opening a brokerage account is the first step to investing. You can open one in as little as 15 minutes, but you'll need to fund it and select investments to start building out your portfolio. 2 By Arielle O'Shea, Pamela de la Fuente Best Brokerage Accounts for Online Investing and Stock Trading in 2026 Based on hours of analysis and hands-on testing, here are our picks for the best brokerage accounts based on their low fees, strong platforms, quality customer support and other factors. Chris Davis Investment Calculator Use our free investment return calculator to estimate how your money can grow. Enter your planned contributions, timeline, rate of return and compounding frequency to get started. Chris Davis Best Investments: Where to Invest in 2026 Wondering where to invest your money this year? High-yield savings accounts, CDs, bonds, funds and stocks are all considered among the best investments available. Learn more about the risks, potential returns and how to get started. 2 By Chris Davis, Alieza Durana The Best-Performing Stocks in 2026 (By One-Year Returns) These are the best 21 stocks in the S&P 500 right now, based on 1-year performance. 2 By Arielle O'Shea, Chris Davis Investing in Dividend Stocks: Guide, Calculator and Top 7 Yields for June 2026 Dividend stocks can be a great choice for investors looking for passive income and portfolio stability. Here's what to look for when evaluating dividend stocks and how to invest in them. 2 By Chris Davis, Sam Taube What Is a Brokerage Account? Where and How to Open One Opening a brokerage account is the first step to investing. You can open one in as little as 15 minutes, but you'll need to fund it and select investments to start building out your portfolio. 2 By Arielle O'Shea, Pamela de la Fuente Best Brokerage Accounts for Online Investing and Stock Trading in 2026 Based on hours of analysis and hands-on testing, here are our picks for the best brokerage accounts based on their low fees, strong platforms, quality customer support and other factors. Chris Davis Investment Calculator Use our free investment return calculator to estimate how your money can grow. Enter your planned contributions, timeline, rate of return and compounding frequency to get started. Chris Davis Best Investments: Where to Invest in 2026 Wondering where to invest your money this year? High-yield savings accounts, CDs, bonds, funds and stocks are all considered among the best investments available. Learn more about the risks, potential returns and how to get started. 2 By Chris Davis, Alieza Durana The Best-Performing Stocks in 2026 (By One-Year Returns) These are the best 21 stocks in the S&P 500 right now, based on 1-year performance. 2 By Arielle O'Shea, Chris Davis Investing in Dividend Stocks: Guide, Calculator and Top 7 Yields for June 2026 Dividend stocks can be a great choice for investors looking for passive income and portfolio stability. Here's what to look for when evaluating dividend stocks and how to invest in them. 2 By Chris Davis, Sam Taube