Now that you know why investing can be a powerful way to build wealth over time, and what the main risks are, it's time to look at the most common type of investment: stocks.

What is a stock?

When you buy a stock, you're buying a small piece of a company. Don't think of it in physical terms: you're not buying an office building, a piece of machinery, or a desk chair. You're buying a slice of ownership: proof that you are, in part, an owner of that company.

Which companies can you invest in?

You can't simply buy stock in any company you like. Stocks are only available in companies that offer freely transferable equity. In practice, this means publicly listed companies. In the UK and internationally, these are typically structured as public limited companies (PLCs). Examples of well-known listed companies include Apple, LVMH, Shell, Unilever, and Adidas.

Private companies can also issue stock, but these aren't available to outside investors. In a private company, stock is typically held by the founders, directors, or sometimes employees and it can't be freely bought or sold on the open market.

For companies, issuing stock is a way to raise money. For example, to fund new products, expand into new markets, or invest in innovation.

Returns on stocks

When you invest in stocks, there are two ways you can generate a return: capital gains and dividends.

Capital gains

Every stock has a price: the current market rate you would pay to buy it right now. That price changes by the minute, moving up and down: sometimes sharply, sometimes more steadily. 

You make a capital gain when you sell a stock for more than you paid for it. The flip side is that you can also make a loss: that happens when you sell for less than you originally paid.

Dividends

Some companies choose to share a portion of their profits with stockholders. This is called a dividend. 

Dividend investing is an approach to investing where your main aim is to earn dividends. Not every company pays a dividend and even companies that do pay dividends don't always do so every year. It's not something you can count on as a guaranteed source of income.

How risky are stocks?

The risk level of any given stock depends on a wide range of factors. How well the company is performing matters, of course, but so does the broader economic environment, supply and demand in the market, and even market sentiment or hype. As a general rule, stocks are considered riskier than bonds, which you'll learn more about in the next lesson.

Stockholder meetings

Because you own a small part of a company as a stockholder, that company has a responsibility to keep you informed about how it's performing. One way this happens is through stockholder meetings, where you can hear how the company's finances are looking, including its balance sheet and income statement. In some cases, you may also have the right to vote on important decisions, such as appointing or removing members of the board.

Key takeaways

• Stocks are proof of ownership. They show that you hold a stake in a company.
• Returns on stocks come in two forms: capital gains and, sometimes, dividends.
• Investing in stocks is generally considered riskier than investing in bonds.