What Is a Stock?
When a company wants to raise money to grow - build a factory, hire engineers, launch a product - it has two options: borrow money (debt) or sell a piece of itself (equity). A stock represents one of those pieces.
When you buy a share of Infosys or Apple, you become a part-owner of that business. You're entitled to a proportional share of its profits (paid as dividends) and its residual value if the company is ever wound up or sold.
Why Companies List on an Exchange
A private company listing its shares on the NSE, BSE, or NYSE is called an IPO (Initial Public Offering). The company gets cash; investors get a stake. After the IPO, shares trade freely between buyers and sellers on the exchange - the company itself isn't involved in most of these transactions.
Common vs Preferred Shares
- •Common shares - what most retail investors buy. You get voting rights and share in profits, but you're last in line if the company goes bankrupt.
- •Preferred shares - a hybrid between equity and debt. Fixed dividends, no voting rights, priority over common shareholders in a liquidation.
What Drives Stock Price?
In the short run, price is driven by sentiment - news, earnings surprises, macro fears. In the long run, price follows fundamentals - earnings growth, return on capital, competitive position.
"In the short run the market is a voting machine, but in the long run it is a weighing machine." - Benjamin Graham
Key Takeaways
- •A stock is a fractional ownership claim on a real business
- •Price in the short run is noise; in the long run it tracks business value
- •Common shareholders bear the most risk - and collect the most reward