What Are Stocks?
When a company wants to raise money to fund expenses, acquisitions, improvements etc., they may elect to issue stock. In exchange for cash, the purchaser (also known as a shareholder) receives shares of stock representing ownership of the company and a resulting claim on the company's assets and earnings.
As a shareholder, the owner participates in the success or failure of the company. If all goes well, the owner participates in the company's earnings. Company profits may, but are not required to, be paid to the shareholder in the form of a dividend. Dividends are usually determined each year, paid quarterly, and expressed in the form of a percentage. A shareholder may also participate in a company's earnings through growth of the share price as it is traded in the stock market. If the company does not perform as expected, the owner's value will decline and, in the worst-case scenario, be worthless if the company goes bankrupt. The good news is that the most a shareholder can lose is their investment in the stock. A shareholder's personal assets are never at risk.
Because the value of a shareholder's investment is so closely tied to the performance of the company, stocks are considered a more risky investment than bonds. However, shareholders are willing to accept this risk because of the historical out performance that stocks offer versus investments such as bonds.