What is a stock?

The financial industry is big and complicated and full of lots of terms many of us may never hear (or understand). But plenty of people have heard of stocks (and the stock market). What is a stock and how does it work?

A stock, explained

A stock is essentially a share of a company. Companies issue (sell) stocks to generate money. As an investor you can typically buy and sell stocks from a company at any time. You can also buy previously issued stocks on a stock exchange.

Many investors like stocks because of the potential for growth, especially over time.

 

Image explaining stock

 

How a stock works

 

Graphic showing stock cycle

 

What are the types of stocks?

The type of stock you have determines if you can vote at shareholder meetings, receive dividends, and get your money back if the business fails.

 

Graphic illustrating common stock

 

 

Graphic illustrating preferred stock

 

You may also hear stock referred to as:

  • class A, B, or C, which indicates voting rights or ownership control.
  • blue chip, which refers to stock in well-known, relatively stable companies.
  • large-cap, mid-cap, small-cap, and microcap, which indicates company size.
  • growth, income, or value, which points to companies poised for future returns, dividends, or stock price increases, respectively.

How do you buy a stock?

Only about 15% of people buy stocks directly.1 But most Americans are already invested in stocks, typically through indirect purchases made when they saved in retirement accounts. You can buy a stock:

  • through your retirement account in transactions made by the investment manager.
  • directly from a company, which is often reserved for employees or existing shareholders.
  • by reinvesting dividends, which is typically for existing stock owners.
  • through a financial professional who does the research on your behalf and may charge a fee.

Why are stocks included in retirement investment accounts?

Lots of different kinds of assets, including stocks, typically make up your retirement accounts. The portion held in stocks includes shares in small and large companies of all kinds. An investment manager chooses what’s in an individual fund or which collection of stocks in different markets drive the potential for growth. That’s diversification at work, which may help to balance risk and reward.

 

Graphic illustrating sample investment mixes

 

Next steps

1 USA Facts

Disclosures and compliance number

Investing involves risk, including possible loss of principal. Investment and Insurance products are:

· Not Insured by the FDIC or Any Federal Government Agency

· Not a Deposit or Other Obligation of, or Guaranteed by Credit Union or Bank

· Subject to Investment Risks, Including Possible Loss of the Principal Amount Invested

Asset allocation and diversification do not ensure a profit or protect against a loss. Past performance does not guarantee future results.

Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investment options are subject to additional risk due to fluctuating exchange rates, foreign accounting and financial policies, and other economic and political environments. Small and mid-cap stocks may have additional risks including greater price volatility. Asset allocation does not ensure a profit or protect against a loss. Fixed-income and asset allocation investment options that invest in mortgage securities are subject to increased risk due to real estate exposure.

Insurance products and plan administrative services provided through Principal Life Insurance Company®. Securities offered through Principal Securities, Inc., member SIPC and/or independent broker/dealers. Referenced companies are members of the Principal Financial Group®, Des Moines, IA 50392.