February 04, 2022

What Is a Stock?

A stock is a financial tool that indicates ownership in an enterprise or firm and indicates a percentage claim on what the firm owns and its general profits.

Stocks are also known as "shares" or "equity."

What Is a Stock?: eAskme
What Is a Stock?: eAskme

Stock ownership means that the person holding the shares (shareholder) owns a bit of the company equivalent to the number of shares held proportional to the total shares.

Say a person who owns 100k shares of a company with a million outstanding shares would possess a 10% ownership. Quite many companies have shares that run into millions of more.

The basics of the stock market:

How does the stock market work, you might ask?

A million and one books have been published, explaining the basics of the stock market; you, however, do not need to read every single one of them to have a good grasp of what the stock market is about.

Stock markets aid both the selling and the buying of these stocks between companies and individual investors.

Most stock trades are often between investors.

Meaning, say you want to buy shares of a particular company and press the "buy" button through your broker's website.

You're purchasing the shares of another investor that has decided to sell, not from the company itself.

On buying the shares of a stock, you've become an investor in the company whose shares you bought.

How prices are calculated on a stock market:

In its simplest form, the prices of stocks on exchanges are dictated by demand and supply.

At any instance, there's a price for a stock, below which an investor isn't ready to sell and above which another investor isn't ready to buy.

A more precise way would be to view it as an auction market where one party is bidding to buy, and the other is trying to sell.

The more the demand for a stock, the quicker investors get to buy shares (quicker than sellers want to peddle them), commanding an upward price surge.

In another vein, investors selling stock more than buying will lead to a drop in price.

The market makers always make buying and selling your stick possible. It is imperative at this point to expatiate the working of market makers.

Market makers ensure there are always buyers, as well as sellers.

You won't always find stock buyers equal to the number of investors willing to sell; take note of the following about the process.

Market makers buy and hold shares, then continuously list ewe sell and buy quotes for shares.

Also, The highest "bidder" to buy shares that are listed from a market maker is referred to as the "bid", whereas the least selling price offered is referred to as the "ask".

A primary reason for employing the market maker system rather than just allowing investors to buy and hold shares to each other directly is to ensure there's always a seller to match every buyer and vice versa.

You do not need to wait until a buyer needs the specific number of shares you want to sell before selling. 

This is what market makers do. 

They will buy your shares straight up.

You've bought a stock, what happens?

I always have to buy and sell stocks through a broker.

A broker is an entity that has the license to exchange stocks on a stock exchange.

The broker advice individuals on what to buy and what to sell, either physically or online (processing all your transactions online).

On purchasing a stock, this, in its simplest form, is how it works;

  • You inform your broker (or input online) of the exact stock you prefer to buy and the number of shares of the stock you want
  • The broker escalates your order up to the exchange; then, a market maker sells the shares to you at the market price at that time.

Then the shares reflect on your account.


Having discussed briefly, in the simplest way,  how the stock market works, you certainly now understand how the stock world is run.

It's a somewhat technical niche and could require mastery, so you don't burn your money.

Read up the article as many times as required until you're ready to invest in the stock market.

Still have any question, do share via comments.

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