What are stocks?

Stocks, shares, equities - what are they, and are they all the same thing?

Once you have sussed the basics, why not explore our beginner’s guide to buying stocks?

What is a stock?

A stock is an investment that represents a portion of ownership in a company. A company might sell some of its shares to investors to raise money. The most common way for a company to sell shares to investors is by 'going public' - which means listing on an exchange in an Initial Public Offering (IPO). 

These investors may have voting rights, which they can use to influence the way the company is run, and are entitled to a share of any profits. 

Normally, these investors can sell this investment to other investors. The price of a stock is determined by many factors, such as company performance, investor perception, demand, the broader economic environment, and more. 

This price is known as the share price, and is the cost of a single unit. Stocks are traded on a stock exchange, which is effectively a marketplace where buyers and sellers meet and agree to buy and sell stocks and other financial instruments. 

Is there a difference between stocks and shares?

While the two terms are often used interchangeably, a share is technically a single unit of ownership in a company, while ‘stock’ is a more general term often used to refer to the instrument. 

For example, you might invest in Apple stock by purchasing 20 shares. 

What is an equity?

Equities are another term commonly used to refer to units of ownership in a company. If somebody says they want to invest in equities, that means they want to invest in stocks and shares.

Equity might also be used to refer to the overall ownership of a company. For example, it might be noted that a major investor owns 20% of a company’s equity. 

What is a shareholder?

As the name suggests, a shareholder is an investor who owns shares in a company. 

What is a stock ticker symbol?

Ticker symbols are short sequences of numbers or letters used to quickly identify a stock. These are generally designed to be recognisable, memorable and linked to the company or its products. For example, you might see:

• Initialisms or acronyms: JPMorgan - JPM
• Abbreviations: Oracle - ORCL
• A short company name: Sony - SONY
• Something related to their product: Harley Davidson - HOG
• Something creative and memorable: Olympic Steel - ZEUS

Different countries and exchanges may have different ticker symbol conventions or requirements. For example, the NYSE says companies can use up to four character symbols. 

Meanwhile, in Japan the tickers are numerical. Toyota is (7203). 

In Europe, stock tickers can be longer and may include letters and numbers. For example, German tourism company Covestro has the ticker 1COV.DE. 

You may also see symbols including a suffix to denote the market on which it is traded. For example, the ‘DE’ in the prior example denotes a stock traded on the German (Deutsche) market and ‘PA’ in BNP Paribas’s BNP.PA symbol refers to the Euronext Paris Stock Exchange.

Companies can even list on multiple countries’ stock exchanges at once. Read our guide to dual listings for more information.

Companies can have multiple ticker symbols to distinguish between different share classes, which may include different voting rules. For example, Google owner Alphabet has (GOOG) and (GOOGL) to refer to its Class C and Class A shares, respectively.

Types of stocks

While there are many varieties, here are a few of the most common you may encounter:

What is a growth stock?

Growth stocks are expected to demonstrate a more rapid increase in revenue and earnings than the market norm. They generally reinvest any profits into the business rather than distributing dividend income, allowing them to continue funding aggressive expansion. 

Their value may also appear inflated against traditional metrics, as their perceived potential can be a major factor in their attractiveness. They can be volatile as well, as investors may back a growth stock based on the expectation of strong and sustained progress only to lose confidence in the business if growth slows or simply fails to meet targets.

Certain sectors can be more likely to feature growth stocks, including healthcare and information technology. 

What are value stocks?

While growth stocks often appear overvalued based on their fundamentals, value stocks can appear like bargains if you are just looking at the numbers. 

You might look at a company’s P/E ratio and dividend yield in order to identify a value stock, and invest based on the assumption that the apparent undervaluation will be reversed over time. 

Stocks can be undervalued for many reasons. Some may operate in unpopular industries, or simply be pushed into value stock territory by negative news stories or short-term headwinds. Even so, they can be a savvy investment over the longer term. 

What are dividend stocks?

Dividend stocks pay out income to investors. This income is derived from company profits. 

They might not generally offer the potential for explosive growth seen with companies that opt to reinvest their profits, but they can provide a steady stream of reliable income and are often perceived to offer more share price stability during periods of market turbulence. 

However, it is worth noting that dividends are not guaranteed, even from companies with a long history of dividend distribution.  

Read our guide to dividend stocks for more information about how they work.

What are penny stocks?

Defined simply, penny stocks have a low price per share. 

In the UK, that means anything with a share price under £1, while US penny stocks can be slightly more expensive as they stretch up to the $5 mark. 

Remember that the value of a company is a combination of the price per share and the number of shares outstanding. That means some companies with a low price per share may actually be valued more overall by investors.

Find out more in our full guide to penny stocks.

What is a meme stock?

‘Meme stocks’ are those championed by online communities of retail investors, resulting in an unusually high level of attention and popularity. 

Often, this process can see a share price become volatile and totally detached from traditional measures of its value. 

For example, January 2021 saw retail investors flocking to back US videogame retailer Gamestop (NYSE: GME). Investors were motivated by a number of factors, including a perception that the company was undervalued, the chance to inflict damage on hedge funds which had shorted the stock, and a simple fear of missing out as the share price started to skyrocket.

What are fractional shares?

Fractional shares allow you to invest with more flexibility. They allow investors to purchase a portion of a share, rather than whole units. 

For example, if Company X has a share price of £100 and you have only £50, it might seem like there is no way to invest. However, if your trading platform offers fractional shares, you could purchase half a share, or a quarter, or another proportion.

Freetrade users can trade fractional shares of US stocks.

What is a stock - FAQs

What is common stock?

Common stock (also known as ordinary shares or voting shares) generally includes voting rights.

The alternative is preferred stock, which does not usually include voting rights. 

Do stocks pay dividends

Some stocks pay dividends, but not all. Freetrade users can easily check whether a company pays dividends to investors. 

Just click on a stock and scroll down to the ‘Dividends’ section to find information about dividend payment dates and ex-dividend dates (the date on which buyers are no longer eligible for the next upcoming dividend).

How much money do I need to buy shares?

The amount of money you need to buy a share will depend on the platform you use and the share price. However, platforms like Freetrade that offer fractional shares can allow you to start buying shares with very small amounts of money. 

Just make sure you are investing sensibly and can afford to do so. The value of your investments can go down as well as up and you may get back less than you invest.