Stocks-What is a stock?

Hint: It's not just a piece of paper

When you buy a stock, you're taking an ownership stake in a company. At some point, just about every company needs to raise money, whether to open up a West Coast sales office, build a factory or hire a crop of engineers. In each case, they have two choices: 1) Borrow the money, or 2) raise it from investors by selling them a stake (issuing shares of stock) in the company. Own a share of stock, and you are a part owner in the company, with a claim (however small it may be) on every asset, and every penny in earnings.

Now, typical stock buyers rarely think like owners, and it's not as if they actually have a say in how things are done. Owning 100 shares of Microsoft makes you, technically speaking, Bill Gates' boss, but that doesn't mean you can call him up and give him a tongue-lashing. Nevertheless, it's that ownership structure that gives a stock its value. If stockowners didn't have a claim on earnings, then stock certificates would be worth no more than the paper they're printed on. As a company's earnings improve, investors are willing to pay more for the stock.

Over time, stocks in general have been solid investments. That is, as the economy has grown, so too have corporate earnings, and so have stock prices. Since the end of World War II, the average large stock has returned, on average, 11 percent a year. If you're saving for retirement, that's a pretty good deal -- much better than U.S. savings bonds, or stashing cash under your mattress.

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