What is a stock?

When people talk about "buying stocks," they mean buying shares in a company. Each share represents a fractional ownership stake. If a company has issued a million shares and you own one, you own a millionth of the business — including a millionth of its future profits.

The key word is ownership. This is what separates a share from a loan. When you lend a company money you buy a bond, and the company owes you that money back. When you buy a share you are not owed anything — you own a piece of the company itself, with what’s called a residual claim: you’re entitled to whatever is left after the company has paid its debts and other obligations.

The two ways a stock makes you money

There are exactly two ways to profit from owning a share:

• Capital appreciation — the share price rises, so you can sell for more than you paid.
• Dividends — the company pays out a slice of its profits to shareholders, usually in cash.

The catch is that both work in reverse. If the company underperforms, the share price can fall, and your shares can lose value — in the worst case, all of it. That risk is the price of the ownership.

Dividends: a share of the profits

A dividend is a distribution of profits back to shareholders. They’re discretionary — the company’s board decides whether to pay one and how much. Mature, steadily profitable companies often pay regular dividends. Fast-growing companies frequently pay none at all, choosing instead to reinvest every pound of profit back into growing the business. Neither approach is "better"; they simply suit different kinds of company.

Voting rights: a say in the business

Ordinary shares usually come with voting rights — the right to vote at the company’s general meetings on things like electing the board of directors and approving major decisions. The standard is one share, one vote, so the more shares you hold, the more say you have. For a small investor this rarely matters much in practice, but it’s a real feature of ownership, and it’s why large shareholders can influence how a company is run.

Ordinary vs preference shares

Not all shares are the same. Most shares are ordinary (or "common") shares: they carry votes, pay variable dividends, and give you full exposure to both the upside and the downside.

Preference shares are different. They rank ahead of ordinary shares for dividends — often a fixed amount — and ahead of them if the company is ever wound up. But they usually carry little or no voting power. In short, preference shares trade away some control and upside in exchange for priority and steadier income.

Dilution: why the number of shares matters

A company can issue new shares whenever it wants to raise money. When it does, the total number of shares rises, and each existing share now represents a smaller slice of the company. That shrinking of your ownership is called dilution.

The opposite is a buyback, where a company repurchases its own shares and cancels them. With fewer shares outstanding, each remaining share owns a slightly bigger piece of the business. This is one reason the raw share price tells you very little on its own — to compare companies you need to look at the whole business, which is where market capitalisation comes in.