Stock

A stock (also known as a share or equity) is a security that represents a slice of ownership in a corporation. When you buy a company's stock, you are not just purchasing a piece of paper or a digital blip on a screen; you are becoming a part-owner of that business. This ownership stake entitles you, the shareholder, to a claim on a portion of the company's assets and earnings. Think of a large pizza: a company can slice itself into millions or even billions of pieces, and each stock represents one of those slices. If the pizza (the company) gets bigger and more valuable, so does your slice. Most stocks of large companies are traded on a stock exchange, like the New York Stock Exchange or the Nasdaq, creating a marketplace where buyers and sellers can easily trade these ownership stakes. For a value investor, understanding that a stock is a piece of a real business—not just a ticker symbol to be gambled on—is the foundational first step toward sound investment.

Why would a company sell off pieces of itself? The primary reason is to raise money, or capital. Imagine you own a successful local bakery and want to open five new locations. You might not have enough cash on hand, and you might not want to take on a massive bank loan. Instead, you can sell shares of your bakery to investors. This process is called an Initial Public Offering (IPO) when a company first offers its stock to the public. The cash from selling these shares provides the fuel for growth—to build new factories, fund research and development, expand into new markets, or hire more people. In essence, the company trades small pieces of ownership for the capital it needs to become more valuable, which ideally benefits everyone in the long run.

As a part-owner, you're not just a silent partner. Ownership comes with certain rights and potential rewards. The two most significant benefits are the potential for profit and a voice in the company's future.

Investors typically make money from stocks in two primary ways:

• Dividends: If the company you've invested in is profitable, its board of directors may decide to distribute some of those profits directly to its shareholders. This payment is called a dividend. It’s like getting your share of the company’s quarterly or annual earnings in cash. Not all companies pay dividends; many younger, high-growth companies prefer to reinvest all their profits back into the business to grow even faster.
• Capital Gains: This is the profit you make from selling your stock for a higher price than you paid for it. If you buy a stock for $50 and its price rises to $70 because the company performs well, you've earned a capital gain of $20 per share when you sell. This appreciation in price is often the main driver of returns for investors, especially in companies that are rapidly growing their intrinsic value.

For most types of stock, ownership comes with voting rights. This means you can vote on important corporate matters, such as electing the board of directors, approving a merger, or other major company policies. While a small investor's single vote might seem insignificant, collectively, shareholders wield the ultimate power over the company's management.

Not all stocks are created equal. They generally come in two main varieties: common and preferred.

This is what most people mean when they talk about stocks. Common Stock represents true ownership and comes with voting rights. Common shareholders have the potential for unlimited upside—if the company becomes wildly successful, the value of their shares can multiply many times over. However, they also take on the most risk. In the event of a bankruptcy or liquidation, they are the last in line to be paid, after creditors, bondholders, and preferred stockholders.

Preferred Stock is a bit of a hybrid, with features of both stocks and bonds.

• Fixed Dividends: Preferred shareholders are typically promised a fixed, regular dividend, much like a bond's interest payment. This dividend must be paid before any dividends are distributed to common shareholders.
• Priority in Liquidation: If the company goes under, preferred stockholders get paid back before common stockholders.
• No Voting Rights: This security and priority usually come at a cost: preferred shares generally do not come with voting rights.

To a follower of Value Investing, the philosophy championed by figures like Benjamin Graham and Warren Buffett, a stock is viewed through a specific, business-focused lens.

The most critical mindset shift is to see a stock for what it is: an ownership interest in a business. You are not betting on a squiggly line on a chart; you are partnering with a company that has real management, products, and competitive advantages. Before investing, a value investor studies the business itself by reading its annual report, analyzing its income statement and balance sheet, and understanding its long-term prospects. The goal is to find wonderful businesses, not just popular stocks.

“Price is what you pay; value is what you get.” This famous Buffett quote is the heart of value investing. The market price of a stock can swing wildly day-to-day based on news, emotion, and speculation. The intrinsic value, however, is an estimate of the business's true underlying worth. A value investor's core task is to calculate that intrinsic value and buy the stock only when the market price is significantly below it. This gap between the price you pay and the value you get is called the margin of safety, which is your ultimate protection against risk.