What Are Stocks and How Do They Work?

Stocks have been making headlines in 2025. But what, exactly, are stocks, and how do they work?

If you buy stock in a company, that means you officially own part of the company. Yes, it may be the tiniest sliver of ownership, but you technically own a share of the company. And if that company performs well, makes money and becomes more valuable, your share of the company will also become more valuable. If that happens, you may be able to sell your stock for more than you bought it for. That's how stocks can help you build wealth.

While there are some small differences, the terms "stocks" and "shares" generally mean the same thing — though it's probably more common to say you "own shares of" or "own stock in" a particular company, and you "own stocks" to refer to owning shares of lots of companies.

So how do stocks work?

Stocks work like this: Companies sell shares of their business to investors. Investors buy those shares (called stock), which in turn provides the companies money for expanding their business through creating new products, hiring more employees or other business initiatives. Investors who bought stock hope that the company will grow, and increase the value of their stock, so they can sell it for a profit.

Companies typically begin to issue shares in their stock through a process called an initial public offering, or IPO. (You can learn more about IPOs in our guide.) Once a company’s stock is on the stock market after the IPO, it can be bought and sold among investors. If you decide to buy a stock, you’ll often buy it not from the company itself, but from another investor who wants to sell the stock. Likewise, if you want to sell a stock, you’ll sell to another investor who wants to buy.

These trades are handled through a stock exchange, with a broker representing each investor. Many investors these days use online investment accounts (also known as brokerage accounts) that make the process extremely simple. If you don’t have a brokerage account, you’ll need one to buy stocks.

» Want to get started? Learn more about what a brokerage account is and how to open one

The way you make money from stocks is by the selling them at a higher price than you bought them. For instance, if you bought a share of Apple stock at $200 and sold it when it reached $300, you would have made $100 (minus any taxes you'd have to pay on the money you made).

» Learn how to make money in stocks

Why should you own stocks?

The primary reason that investors own stock is to earn a return on their investment. That return generally comes in two possible ways:

• The stock’s price goes up. You can then sell the stock for a profit if you’d like.

• The stock pays dividends. Not all stocks pay dividends, but many do. Dividends are payments made to shareholders out of the company’s revenue, and they’re typically paid quarterly.

Over the long term, the average annual stock market return is 10%; that average falls to between 7% and 8% after adjusting for inflation. That means $1,000 invested in stocks 30 years ago would be worth over $8,000 today.

It’s important to note that that historical return is an average across all stocks in the S&P 500, a collection of around 500 of the biggest companies in the U.S. It doesn’t mean that every stock posted that kind of return — some posted much less or even failed completely. Others posted much higher returns.

That’s why it’s wise to buy stock not in just one company, but to build a well-rounded portfolio that includes stocks in many companies across various industries and geographies.

» Learn how to invest in the S&P 500

Am I really part of the company if I own company stock?

Most investors own what’s called common stock, which is what is described above. Common stock comes with voting rights (you'll likely have the chance to cast your vote regarding changes the company wants to make, but unless you own a ton of shares, your vote doesn't actually mean a lot), and may pay investors dividends. There are other kinds of stocks, including preferred stocks, which work a bit differently. You can read more about the different types of stocks here.

Again, owning a stock doesn’t mean you carry a lot of weight within the company, or that you get to rub elbows with company bigwigs. It also doesn’t mean that you own a piece of the company’s assets — you aren’t entitled to a parking spot in the company lot or a desk at the company’s headquarters.

What you own, essentially, is a share in the company’s profits — and, it should be said, its losses. The goal, of course, is for the value of the company — and as a result, the value of its stock — to go up while you’re a shareholder.

But while stocks overall have a history of high returns, they also come with risk: It’s entirely possible that a stock you own will go down in value instead. Stock prices fluctuate for a variety of reasons, from overall market volatility to company-specific events, like a communications crisis or a product recall.

Many long-term investors hold on to stocks for years, without frequent buying or selling, and while they see those stocks fluctuate over time, their overall portfolio goes up in value over the long term. These investors often own stocks through mutual funds or index funds, which pool many investments together. You can buy a large section of the stock market — for example, a stake in all of the companies in the S&P 500 — through a mutual fund or index fund.

The bottom line

Stocks are shares of ownership in publicly traded companies. Companies issue them on stock exchanges to raise money, at which point investors buy and sell them based on their potential to go up in value or pay dividends.

Buying and holding stocks can help you grow your wealth and reach your long-term financial goals.