Shares of Stock

Shares of stock (often called simply 'stock' or 'Equity') are units of ownership in a Public Company. Imagine a company is a giant, delicious pizza. Buying a share of stock is like buying one slice of that pizza. As a proud owner of that slice, you are now a part-owner of the entire pizza business. This makes you a Shareholder, and it entitles you to a portion of the company's profits and a claim on its Assets. When the company does well, the value of your slice can grow. If it pays out some of its earnings to its owners, you get a small cash payment called a Dividend. These shares are traded (bought and sold) between investors on a Stock Market, where the price of a slice can change every second based on what buyers are willing to pay and what sellers are willing to accept.

So, why would a company want to sell off little pieces of itself? The answer is simple: to raise money, or Capital. When a company wants to grow—by building new factories, expanding into new countries, or funding a big research project—it needs cash. One of the most effective ways to get that cash is to go public through an Initial Public Offering (IPO) and sell shares to investors. Unlike taking out a loan from a bank, this money doesn't have to be paid back. It's a trade: investors provide the company with permanent capital, and in return, the company gives investors an ownership stake. This gives the business the fuel it needs to grow, and if it's successful, the value of those shares increases, rewarding the investors who believed in it.

Not all shares are created equal. They generally come in two main varieties: common stock and preferred stock. Understanding the difference is crucial.

This is what most people mean when they talk about buying “stock.” Common Stock represents true ownership.

• Voting Rights: As a common shareholder, you have a say in how the company is run. You get to vote on major corporate decisions, most notably electing the Board of Directors, who are supposed to represent the shareholders' interests.
• Potential for Growth: The value of your common shares can grow to unlimited heights if the company is successful. You share directly in the company's triumphs.
• Dividends are Optional: The company's board decides whether to pay dividends to common shareholders. Payments are not guaranteed and can be increased, decreased, or eliminated at any time.
• Last in Line: If the company goes bankrupt and has to sell everything, common shareholders are the very last to get paid, after all the lenders and preferred shareholders have been settled.

Preferred Stock is a bit of a hybrid, acting like a cross between a stock and a bond.

• No Voting Rights: Preferred shareholders typically have no say in running the company. They are passive financial stakeholders.
• Fixed Dividends: The key benefit of preferred stock is that it usually pays a fixed, predictable dividend. The company is obligated to pay this dividend to preferred shareholders before any dividends are paid to common shareholders.
• Priority Payout: If the company goes belly-up, preferred shareholders get paid back their investment before common shareholders get a single cent (but still after bondholders). This makes it a less risky investment than common stock.

To a trader, a share of stock is just a ticker symbol that zips across a screen—something to be bought and sold quickly for a profit. To a Value Investing practitioner, it is something much more profound. Following the wisdom of legends like Benjamin Graham and Warren Buffett, a value investor sees a share of stock for what it truly is: a fractional ownership of a real business. The daily price fluctuations of the stock market are seen as nothing more than the manic-depressive mood swings of “Mr. Market.” The value investor's job is not to guess these moods but to ignore them. Instead, they focus on analyzing the underlying business to calculate its Intrinsic Value—what a rational businessperson would pay for the whole company. The core of the strategy is to buy shares only when the market offers them at a significant discount to that intrinsic value. This discount is the famous Margin of Safety, which provides both a cushion against error and the potential for excellent returns. By purchasing shares of stock this way, you stop being a speculator and become a business owner.