How Does Buying Stock Work?

What is Stock?

When you buy stock, you buy ownership in a company. Many times, companies issue thousands of shares of stock, but if you found one that only issued 100 shares and you bought one share, you would own 1/100th of the company. Direct purchase programs allow you to buy smaller amounts of stock with minimal fees. Another way to buy stock inexpensively is an online brokerage account.

Stocks fluctuate in price, reflecting the amount of money someone is willing to pay for the stock and the price another person wants for the stock. It's like an auction if you look at the New York Stock Exchange. Seller X wants $10 for his stock, but buyer Y won't buy it until it's $9. Seller Z jumps at the chance to sell his stock for $9, and so the price of the stock drops to $9. The first seller could drop his price and hope that the stock goes up, or sell for $9.

Sometimes the stock market reflects facts. If a company loses a great deal of money, it isn't as valuable to many investors as one that grows by leaps and bounds, so the price drops. This is a real reflection of the value in many cases. Sometimes, however, the changes in the stock market simply reflect fear or greed. Stocks often drop when people hear scary reports about market conditions. The reports seem to make the outcome true and stocks drop. The news also can drive the market upward by reporting a more cheery outcome. It's not always the news that drives the price; sometimes people see a stock dropping and sell because of fear, making the price lower. The reverse is also true; sometimes people see the price going up and jump on the bandwagon to make it run higher.

If you buy stock in a brokerage account, you get the shares recorded but you don't get a certificate for the stocks. Very few stocks use certificates anymore. Even when you buy stocks directly from the company, you often have the number of shares recorded in your account--but unless you specifically request one, you're not sent a certificate.

You make money by buying the stock at a low price and selling it for a higher price. You also make money when the company makes money and decides to give a dividend. The dividend is part of the profit the company makes. Each share gets a specific amount of money. Many companies allow you to use that dividend to purchase partial or full shares of stock.