The often used definition of a stock goes like this: “A stock is a share in a company that allows ownership in part of the company. Stock represents a claim on the company`s assets and earnings. Buying more stock gives on more ownership in the company.” It is important to note though the stock holders do not own corporations, they only own the shares of corporations. Corporate property is legally separated from the property of the shareholders. This limits the liability of both the corporation and the shareholder.
Still, for the sake of this discussion we will make a clear distinction between the stock holder and the bond holder. The stock holder has a small piece of the company. The holder owns shares in the company whereas the bond holder has effectively made a loan the the company. So when you buy stocks are you looking for the firm to produce profits and increase sales and market share for one reason, to see the stock price move higher. Buying stock in Apple at $50 per share and watching over the years move to $100 to $200 per share makes you a healthy profit.
Companies can issue stocks, also known as equity or equities to grow the business and take on new projects. Keep in mind that when a company issues shares, it does not return that money. This would be in the world of bonds, when companies issue bonds and they effectively borrow the money. Bondholders are only entitled to receive the return (the coupon) given and of course decided beforehand at the interest rate agreed upon by the bond. Bonds are more often used by mature of long-standing firms that need cash flow for net projects – an auto company building a new factory is an example in which bonds are sometimes issued.
History tells us that buying stocks, could mean that the stock goes to zero. So stocks are usually, from an historic point of view, more risky. Bonds fade or trade lower, but buying a stock at $50 per share does mean that the company goes bankrupt and the stock trades to zero. The investment is worthless.
Have a look at IPO, or Initial Public Offering. This is when a company, let`s say Facebook issues stock. Knowing that the founders own many of the shares, this IPO makes them all rich overnight as the founders have massive amounts of shares. But this is a double-edge sword. In the recent collapse of stock since July of 2018, the board members gave back or lost over 30 billion dollars – on paper – as their shares were worth over 30 percent less in the sell-off.