Create a free account to save your progress, earn certificates, and pick up where you left off.
Create Free Account Log InOwn a Piece of a Company
Understanding stocks and how they build wealth
What You'll Learn
- Understand what stocks are and how they work
- Learn how you make money from stocks
- Discover different types of stocks
- Know when stocks make sense for your portfolio
What Is a Stock?
When you buy a stock, you're buying ownership in a company. Not the whole company — just a small piece of it. But that piece gives you a share of the company's future success or failure.
What is a Stock?
Click to learn
Stock (Equity)
An ownership share in a company. When you buy stock, you become a partial owner. If the company does well, your shares become more valuable. If it struggles, they can lose value.
Think of it this way: Imagine a pizza cut into 1,000 slices. A company's stock works the same way — except the pizza might be cut into millions or billions of slices. When you buy one share, you own one slice of that company.
How Do You Make Money from Stocks?
There are two main ways stocks generate returns:
1. Price Appreciation
Click to learn more
Price Appreciation (Capital Gains)
You buy a stock at one price and sell it later at a higher price. The difference is your profit.
Example: You buy 10 shares of Apple stock at $100 per share. Five years later, Apple is worth $150 per share. You sell for $1,500. Your profit: $500.
2. Dividends
Click to learn more
Dividends
Some companies share their profits with shareholders by paying regular cash dividends (usually quarterly).
Example: You own 100 shares of Coca-Cola. The company pays a $0.50 dividend per share each quarter. You receive $50 every three months.
Best of both worlds: Many investors reinvest their dividends to buy more shares automatically, which compounds their returns over time.
Real-World Example
Maria's Stock Investment
January 2020: Maria buys 10 shares of Microsoft at $160 per share. Total investment: $1,600.
2020-2024: Microsoft pays dividends totaling $100 over four years.
January 2025: Microsoft stock is now worth $420 per share. Maria's 10 shares are worth $4,200.
Total return: $2,600 price appreciation plus $100 dividends equals $2,700 profit on $1,600 invested.
Different Types of Stocks
| Stock Type | Description | Best For |
|---|---|---|
| Growth Stocks | Companies expected to grow rapidly. Usually pay no dividends. | Long-term investors seeking appreciation |
| Dividend Stocks | Established companies that pay regular dividends. | Income-focused investors |
| Blue Chip Stocks | Large, stable companies like Apple, Walmart. | Core portfolio holdings |
| Small-Cap Stocks | Smaller companies with high growth potential. | Experienced investors only |
The Risks of Individual Stocks
Here's the hard truth: most individual stocks don't beat the market. And picking winning stocks consistently is extremely difficult.
Individual stocks carry specific risks:
- Company risk: One bad quarter or scandal can tank the stock price
- Sector risk: Entire industries can struggle
- Volatility: Individual stocks swing wildly in price
For Beginners: Skip Individual Stocks
Unless you have the time and knowledge to research companies thoroughly, individual stocks are risky. Most beginners are better off with index funds that own hundreds of stocks automatically.
When Do Stocks Make Sense?
Stocks are appropriate when you have a long time horizon (10+ years), can handle volatility without panicking, are investing for growth rather than immediate income, and have already covered your emergency fund and short-term needs.
If you need your money in less than 5 years, stocks are too risky. Stick with savings accounts or bonds.
Your Action Step
Look up the stock price of a company you recognize.
Go to Google Finance or Yahoo Finance. Search for a company you know. Look at the current stock price and the 5-year chart. Notice how much the price has moved up and down. This is the volatility you accept when you invest in stocks.
Remember This
Stocks represent ownership in real companies. Over the long term, stocks have been the best-performing asset class for building wealth. But they come with volatility, and individual stocks are risky. For most investors, owning stocks through diversified funds is the smarter strategy.