Investor Corner/The asset classes/Equity Concepts
2.1.1 What Is Equity / Stock?
A share of stock is a small piece of ownership in a company. When the business grows in value or pays out profit, shareholders benefit. When it shrinks or fails, shareholders can lose money.
Ownership, not a loan
Buying a share makes you a part owner of that company, however small the stake. This is different from lending money to a company through a bond, where you are owed a fixed repayment regardless of how the business performs. As a shareholder, your return depends entirely on how the company actually does.
That distinction is the reason equity carries more risk than debt, and also why it has historically offered a higher return. Owners share fully in both the upside and the downside; lenders are promised a fixed amount and nothing more, but they are paid before owners in almost every scenario.
Two ways a shareholder gets paid
A company can return money to shareholders in two ways: paying a dividend out of profit, or growing in value so the share price rises. Many companies do a mix of both. Growth companies tend to reinvest profit into the business instead of paying it out, which is why they often pay smaller dividends while aiming for a rising share price instead.
What actually drives the price
Over the short term, a stock's price is driven by sentiment, news and flows, and it can move for reasons that have little to do with the underlying business. Over years, price tends to follow earnings: a company that consistently grows its profit tends to see its share price follow, even if any individual year looks disconnected from that trend.
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