what are stocks in simple terms: A simple guide

What are stocks? (in simple terms)

If you search "what are stocks in simple terms", here is a plain‑English answer up front: a stock (or share) is a unit of ownership in a company that gives the shareholder a claim on part of the company’s assets and earnings. Stocks differ from bonds (which are loans to a company) and from cryptocurrencies (which are digital tokens without the same legal ownership claims and regulated reporting). This article explains, step by step, why stocks matter, the main types, how they’re issued and traded, how prices move, the main ways investors can earn, the risks involved, and practical next steps for beginners — with neutral facts and a mention of Bitget as a trading and custody option for those ready to explore.

Note: this guide is educational only. It does not offer investment advice.

Overview / Key points

• A stock (share) represents a fractional ownership stake in a company.
• Investors earn from stocks via capital gains (selling at a higher price) and dividends (company payouts).
• Stocks trade on exchanges through brokers and electronic marketplaces.
• Stock prices fluctuate due to supply and demand and a range of company, industry and macro factors.
• Stocks offer growth potential but carry risks including loss of principal.

History and purpose of stocks

Companies issue stock to raise capital without taking on debt. Selling shares lets a business fund expansion, R&D or acquisitions while sharing future profits (and risks) with owners. Public markets developed so many investors could buy and sell those ownership claims — typically via an initial public offering (IPO) and then on a stock exchange. Over centuries, stocks have become central to modern finance and long‑term wealth creation for households and institutions.

Types of stocks

Common stock

Common stock is the most widespread type. Holders usually receive:

• Voting rights (often one vote per share) to elect the board of directors and approve major actions.
• Potential for capital appreciation if the company grows.
• Variable dividends: companies may pay dividends but are not required to.

Common shareholders stand to benefit most when a company does well, but their claims are junior to creditors if the company is liquidated.

Preferred stock

Preferred stock blends features of equity and fixed‑income:

• Priority over common stock for dividend payments (and sometimes for assets in liquidation).
• Dividends are often fixed or set according to a formula.
• Typically limited or no voting rights.

Preferred shares can suit investors seeking steadier income than common stock but still carrying equity‑style risks.

American Depositary Receipts (ADRs) and other cross‑border forms

ADRs let foreign companies’ shares trade on U.S. exchanges. A U.S. bank holds the underlying foreign shares and issues ADRs representing them — simplifying trading, settlement and U.S. dollar access. Other depositary mechanisms exist in different markets to help international investing and cross‑listing.

What owning a share actually means

Owning a share means you own a tiny piece of the company. Practically, that ownership gives you a few rights and limitations:

• Fractional ownership: most individual shares are a very small percentage of the company.
• Voting rights: common shareholders can vote on directors and major corporate matters (in proportion to holdings).
• Claims on earnings: shareholders may receive dividends when the board declares them.
• Claims on assets: in liquidation, shareholders are paid after creditors and preferred holders.
• Limited liability: shareholders are not personally responsible for company debts beyond their investment.

Owning stock is a legal claim recorded in brokerage accounts or on company registers; many investors hold shares through brokerage custody rather than as physical certificates.

How stocks are issued and traded

Issuance: private shares, IPOs, follow‑on offerings

Companies begin with private shares (founders, employees, early investors). To raise broader capital, a company may go public through an initial public offering (IPO), selling new shares to public investors and listing on an exchange. After an IPO, companies can raise more capital via follow‑on offerings or issue shares for acquisitions and employee compensation.

Stock exchanges and brokerages

Exchanges are organized marketplaces where stocks are listed and traded under rules and reporting requirements. Each listed company has a ticker symbol used to identify its shares. Investors access markets through brokers (retail or institutional); many retail platforms now support electronic trading and fractional shares, lowering the minimum capital needed to start. For traders and investors considering custody and trading solutions, Bitget provides exchange services and custody/wallet options for digital asset investors exploring integrated experiences.

Order types and trading mechanics (basic)

• Market order: buy or sell immediately at the best available price.
• Limit order: buy or sell only at a specified price or better.
• Bid/ask spread: the difference between the highest price buyers will pay (bid) and the lowest price sellers will accept (ask).
• Liquidity: how easily shares can be bought or sold without moving the price; high liquidity often means lower transaction costs.

How stock prices move

Price changes are driven immediately by supply and demand in the market. That supply/demand balance reflects many influences, including:

• Company fundamentals: earnings, revenue growth, profit margins and outlook.
• News and events: product launches, leadership changes, regulatory rulings.
• Macroeconomic indicators: GDP, inflation, employment and interest rates.
• Industry trends: competition, technological change and sector cycles.
• Investor sentiment: risk appetite, momentum and short‑term trading flows.

Short‑term price moves can diverge from a company’s long‑term intrinsic value due to emotion, liquidity swings and macro shocks.

As of January 2026, according to Bloomberg, investors saw that concentrated exposure to the largest technology companies had driven much of recent market performance: the so‑called "Magnificent 7" rose about 25% in 2025 while the broader SP 500 rose roughly 16% in the same year — a reminder that market leadership can shift and that stock performance can be uneven across groups.

Ways investors can earn from stocks

Capital gains

Capital gains occur when you sell shares for more than you paid. Gains are "realized" when sold; before selling, any increase is an "unrealized" gain. The basic strategy is buy low, sell high — but identifying timing and value requires analysis and risk tolerance.

Dividends

Dividends are periodic payments from a company’s profits to shareholders. Key points:

• Frequency: quarterly, semi‑annual or irregular.
• Dividend yield: annual dividends divided by current share price — a common way to compare income from stocks.
• Reinvestment: many investors reinvest dividends to compound returns over time.
• Dividends are discretionary and can be cut or suspended.

Total return

Total return equals price appreciation plus dividends received over a period. For long‑term investors, total return is the most complete measure of performance.

Valuation and basic metrics

Common metrics used to evaluate stocks include:

• Market capitalization: total market value of a company’s outstanding shares (price × shares). It's used to classify companies by size (small/mid/large cap).
• Price‑to‑earnings (P/E): share price divided by earnings per share (EPS); indicates how much investors pay per dollar of earnings.
• Price‑to‑book (P/B): price relative to book value per share.
• Earnings per share (EPS): company earnings divided by shares outstanding.
• Dividend yield: annual dividends divided by current price.
• Revenue and growth indicators: top‑line sales growth and margins.

Metrics are tools to inform decisions; they are not guarantees. Different industries have different typical ranges and investors should compare like with like.

Risks and limitations

Principal risks when owning stocks:

• Market volatility: prices can swing widely in short periods.
• Company‑specific risk: poor management, competition, regulatory problems or accounting issues can hurt a company’s shares.
• Sector or country risk: entire industries or markets can underperform.
• Liquidity risk: less‑traded stocks may be hard to buy or sell without moving the price.
• Loss of entire investment: in bankruptcy, common shareholders may receive little or nothing.

Historically, stocks have tended to outperform many asset classes over long periods, but they bring greater short‑term volatility and no guaranteed returns.

Investing approaches and strategies

Individual stock picking

Picking individual stocks means researching company financials, competitive position, leadership and future prospects (fundamental analysis). This approach can offer higher upside but concentrates risk in fewer companies and requires time and skill.

Diversification and index funds / ETFs

Diversification spreads risk across many companies or sectors. Index funds and ETFs (exchange‑traded funds) track broad baskets of stocks and give instant diversification, making them popular for beginners who want market exposure without the single‑company risk.

Active vs. passive investing

• Active: managers try to beat a benchmark by selecting stocks and timing trades; typically higher fees and inconsistent outperformance.
• Passive: tracking an index with lower fees; often chosen for long‑term, low‑cost exposure.

Both approaches have tradeoffs in fees, risk and expected outcomes.

Practical guide: how to start buying stocks (simple steps)

1. Set goals and time horizon: define why you’re investing and how long you can keep funds invested.
2. Learn basic terms and tickers: become familiar with ticker symbols, market hours and how to read quotes.
3. Choose a brokerage: pick a regulated broker with clear fees, custody protections and the services you need. For those exploring an integrated crypto and digital asset experience, consider Bitget’s trading and custody options.
4. Understand fees and taxes: know commissions, spreads, platform fees and tax treatment for your jurisdiction.
5. Start small or use fractional shares: fractional shares let you buy parts of expensive stocks with less capital.
6. Consider diversified funds first: many beginners start with index funds or ETFs to reduce company‑specific risk.
7. Keep records and monitor: keep transaction records and review holdings periodically.

Regulation, investor protection, and market participants

Major regulators (for context) include the U.S. Securities and Exchange Commission (SEC) and oversight bodies such as FINRA in the U.S.; other countries have equivalent regulators. Exchanges enforce listing and disclosure rules. Key market participants: retail investors, institutional investors, market makers, brokers and clearinghouses. Protections include required disclosures, periodic reporting, and broker oversight — all designed to improve transparency and protect investors.

Taxes and recordkeeping (brief)

Many jurisdictions tax capital gains and dividends. Common considerations:

• Capital gains vs. ordinary income: rates and treatment can differ.
• Holding period: some tax systems use short‑term vs. long‑term holding periods to set rates.
• Dividends: may be taxed when paid.

Keep accurate transaction records for tax filing and consult a tax professional for jurisdiction‑specific guidance.

Common misconceptions and FAQ (short)

• "A stock is the same as a company’s value": Not exactly — a stock’s market price reflects what buyers and sellers are willing to pay, which may differ from intrinsic company value.
• "Price equals intrinsic value": Market price can deviate from intrinsic value for long periods.
• "Dividends are guaranteed": Dividends are declared at a company’s discretion and can be reduced or stopped.

Notable related concepts (short definitions)

• Bond vs. equity: bonds are loans with fixed payments; equity (stocks) are ownership claims.
• Market capitalization categories: small cap, mid cap, large cap (based on market value).
• Index: a basket of stocks used as a benchmark (examples: S&P 500, Dow Jones Industrial Average).
• IPO: initial public offering, the first sale of stock to public investors.
• Insider trading: illegal trading based on material non‑public information.
• Fractional shares: parts of a full share allowing smaller investments.

Differences from cryptocurrencies (short note)

Stocks represent legal ownership in real companies with regulated reporting, shareholder rights and established legal frameworks. Cryptocurrencies are digital tokens with varied utilities and regulatory treatments; they typically do not confer ownership or traditional corporate governance rights.

Further reading and resources

For deeper tutorials, up‑to‑date market data and investor education, consult regulator and large‑broker education pages. Good neutral sources of investor education include regulator sites and major investment education pages (search for SEC, FINRA, and broker education centers). These sites offer calculators, tutorials and checklists for beginners.

Glossary

• Share: one unit of ownership in a company.
• Dividend: a payment from a company to shareholders from profits.
• Market cap: total market value of a company’s outstanding shares.
• Ticker: a short symbol that identifies a listed company.
• IPO: initial public offering.
• Liquidity: how easily an asset can be bought or sold at stable prices.
• Bid/ask: the highest buy price and lowest sell price in a market.

Final notes and next steps

If you want a simple, safe way to gain exposure while learning, many beginners start with diversified index funds or ETFs before trying individual stock picking. When ready to trade or custody assets, choose a regulated platform with transparent fees and clear custody arrangements — for traders exploring integrated services across traditional and digital asset markets, Bitget offers trading and wallet options that may fit those needs.

Ready to learn more or take the next step? Explore Bitget’s educational resources and account options to compare custody, fees and supported services. Start small, keep records, and build knowledge over time.