What a stock really is.

A company, cut into slices.

Every company has owners. Stock is how a company gets split up so it can have many owners at once, from one cousin to millions of strangers.

Shares and shareholders

A company's ownership is cut into equal pieces called shares. People also call them stock. Whoever owns shares is a shareholder, a part owner of the company. How big your slice is depends on how many of all the shares you own.

Selling slices to raise money

To raise $40,000, Rosa can create new shares and sell them to Luis at $160 each. She needs $40,000$160 = 250 new shares. Now there are 1,250 shares, and Luis owns 250 of them: 2501,250 = 20% of the company. Rosa's 1,000 shares are now 80%. When new shares make every old share a smaller slice, that's called dilution.

Drag the slider to try other deals with Luis.

What you're looking at: a pie chart of who owns Rosa's Bike Co. The slider sets how much Luis invests, from $0 to $200,000, always at $160 a share. Blue is Rosa's 1,000 shares and orange is the new shares Luis buys. The number in the middle is the total number of shares.

From a bike shop to the stock market

Big companies do the same thing on a giant scale. The first time a company sells shares to the public, it's called an IPO, short for initial public offering. After that, people buy and sell the shares with each other on a stock exchange, like the New York Stock Exchange (NYSE) or the Nasdaq. Each company has a short code called a ticker symbol.

Two ways a share pays you

A company's profit is the money left after it pays all its costs. It can pay some of that profit out to its owners as a dividend, a set amount for every share. It can also keep the profit to grow the business, which can make each share worth more. When a share's price rises above what you paid, that rise is a capital gain. Your total return counts both.

Reading a stock quote

Say Rosa's Bike Co. is now public. In a brokerage app, its quote would look like this. Two numbers on it need names. Market cap, short for market capitalization, is the price times the number of shares: what the whole company is worth at today's price. Dividend yield is one year of dividends as a percent of the price. Tap each part of the quote.

Why prices move

A share's price is whatever buyers and sellers agree on right now. If more people want to buy than sell, the price climbs until enough sellers show up. That's supply and demand. And what makes people want a stock is mostly what they expect the company's future profits to be. Good news about future profits pushes the price up, and bad news pushes it down, often within seconds.

The catch: one company can fail

If a company goes bankrupt, its shares can become worthless. Blockbuster went bankrupt in 2010 and Sears in 2018, and their shareholders were left with almost nothing. Even among companies that survive, most don't do very well over the long run. Professor Hendrik Bessembinder of Arizona State University studied nearly 26,000 U.S. stocks from 1926 to 2016 and found:

What you're looking at: real research, drawn as 100 squares where each square is 1% of all U.S. stocks from 1926 to 2016. Orange squares did worse than Treasury bills, light blue squares beat them, and the 4 dark blue squares are the big winners. Source: Hendrik Bessembinder, "Do Stocks Outperform Treasury Bills?" (Journal of Financial Economics, 2018).

So picking one stock is a gamble on landing in that 4%. The stock market as a whole has done well because those few giant winners more than made up for everyone else. The game below shows what that feels like, and the next lesson shows the fix: owning all of them at once.

One stock or all ten?

Ten made-up companies, twenty years. Each round, you pick one company and put $1,000 into it. At the same time, another $1,000 goes into all ten companies at once, $100 each. Then twenty years play out. Play three rounds and see how often your pick beats owning all ten.

What you're looking at: a simulation, not real companies. Years run along the bottom, from 0 to 20, and up the side is how much each $1,000 is worth. The orange line is your one company and the blue line is $100 in each of the ten. Each round, the game secretly hands out a mix of outcomes shaped like the research above: 1 giant winner, 2 strong companies, 1 steady one, 2 slow ones, 2 that shrink and 2 that go bankrupt. That makes 6 of the 10 do worse than Treasury bills, close to the real 58%. Which company gets which outcome is random, so the descriptions don't give it away.

Squirrels don't bury everything in one hole.

Gray squirrels get ready for winter by scatter hoarding: they bury their nuts one at a time in separate spots, hundreds or even thousands of them across their territory. If another animal digs up one spot, the squirrel loses one nut, not its whole winter.

What you're looking at: an illustration, not data. Each little acorn under the ground is buried in its own spot. The dashed red circle is the one spot a jay found and dug up. The rest are still safe.

Why this sticks. Putting everything into one company is like burying the whole winter supply in one hole: if that hole gets raided, everything is gone. Spreading your money across many companies is scatter hoarding. A bankruptcy costs you one nut. And some of the nuts squirrels forget about grow into oak trees, just like a few companies grow into giants.

Grab a friend or a study group.