What Is a Stock?

What a stock actually is

When a company wants to raise money without taking on debt, it can offer ownership stakes to outside investors. It does this by dividing itself into a large number of equal units and selling those units to whoever wishes to buy them. Each unit is a share, also called a stock. If a company issues one million shares and you own ten thousand of them, you own one per cent of the company. Every share confers the same rights as every other share of the same class.

The word "stock" comes from the US and is the standard term in American financial markets. In the UK, the more common term is "share." In practice the two words are interchangeable in almost every context you will encounter as a trader. When financial media refer to "global equity markets," equity is simply another word for the same thing: ownership stakes in companies.

The key difference between owning a share and owning almost any other financial instrument is that a share makes you a part-owner of a real, operating business. It is not a loan to the company, as a bond is. It is not a contract that tracks a price, as a CFD is. It is fractional ownership, with the rights and risks that come with it.

What owning a share actually entitles you to

Owning shares entitles you to three things. The first is a proportional claim on any profits the company distributes to shareholders. These distributions are called dividends. Not all companies pay dividends. Many younger or faster-growing companies reinvest their profits rather than distributing them. Dividends are declared at the discretion of the company's board and are never guaranteed.

The second entitlement is voting rights at general meetings. As a shareholder, you are entitled to vote on significant company decisions, including the appointment of directors and the approval of major transactions. In practice, a retail investor owning a small number of shares has minimal influence over company decisions. But the right exists, and for some investors it carries ethical or governance weight.

The third entitlement is a claim on the company's assets if it is wound up. In a liquidation, assets are sold and proceeds distributed, but shareholders sit at the back of the queue behind creditors, bondholders, and other debt holders. In most cases, if a company becomes insolvent, shareholders receive little or nothing.

It is equally worth being clear about what owning shares does not give you. It does not give you influence over the company's day-to-day operations. It does not guarantee any return on your money. And it does not protect you from the share price falling, potentially to zero, if the company performs poorly or fails.

How share prices actually move

The single biggest driver of an individual share price is the company's earnings results. Most listed UK companies report results twice a year; US companies report quarterly. A results announcement tells the market how much revenue the company generated, how much profit it made, and what the management team expects for the period ahead.

What matters is not the absolute number but how it compares to what the market was expecting. A company can report record profits and see its share price fall sharply on the same day if those profits were below analyst forecasts. Conversely, a company reporting a loss can see its shares rise if the loss was smaller than expected and guidance for the future was positive. Markets are forward-looking: they price in expectations, and they react to the gap between expectations and reality.

Beyond earnings, three other forces shape share prices. Sector sentiment affects companies that operate in the same industry: rising oil prices tend to lift energy stocks broadly, not just the most profitable ones. Broader market conditions create a tide that raises or lowers most boats simultaneously: in a broad equity rally, most stocks rise; in a sell-off, most fall, regardless of individual company quality. And macroeconomic factors, particularly interest rates, affect the overall level of equity valuations. When interest rates are high, the discount rate applied to future company earnings rises, which compresses the present value of those earnings and tends to lower share prices across the board.

Buying shares versus trading shares via CFD or spread betting

There are two fundamentally different ways to get exposure to a share price as a UK retail participant. The first is to own the share. The second is to hold a contract that tracks its price without owning anything.

When you own shares directly, you need a share dealing account or a Stocks and Shares ISA. The Stocks and Shares ISA is a UK tax wrapper that allows you to hold shares, funds, and ETFs and pay no Capital Gains Tax on profits within the annual ISA allowance. For buy-and-hold investors, the ISA is often the most tax-efficient way to hold UK equities.

When you trade shares via CFD or spread betting, you are not a shareholder in the company. You hold a contract with a broker that tracks the share price. If the price moves in your favour, the broker pays you the difference. If it moves against you, you pay the broker. This means you can profit from a share price falling, by taking a short position, something that is not straightforward for retail investors dealing in actual shares. It also means you can use leverage, putting up a fraction of the total position value as margin.

The tax treatment differs meaningfully. Profits from CFD trading are subject to Capital Gains Tax in the same way as profits from direct share ownership, though losses can be offset against gains. Spread betting profits are free from Capital Gains Tax and Stamp Duty in the UK. Neither CFDs nor spread betting are available within an ISA wrapper.

The London Stock Exchange in context

The London Stock Exchange (LSE) is one of the oldest stock exchanges in the world. Most of the UK shares you will encounter as a retail trader are listed here. The LSE operates two main markets relevant to retail investors.

The Main Market is where the largest and most established companies list. The FTSE 100, covering the 100 largest by market capitalisation, and the FTSE 250, covering the next 250 below that, both draw exclusively from this market. Companies on the Main Market are subject to the highest level of regulatory scrutiny and disclosure requirements.

AIM, the Alternative Investment Market, hosts smaller and earlier-stage companies. Listing requirements on AIM are less onerous than on the Main Market, which creates opportunity for growth-stage businesses to access public capital. It also means that AIM-listed companies carry higher risk: disclosure standards are lower, liquidity is often thinner, and a meaningful proportion of AIM companies have limited trading history. For traders new to equities, sticking to Main Market and FTSE-listed companies is a more manageable starting point.

The ISA framework is worth mentioning again here. The annual Stocks and Shares ISA allowance allows UK residents to invest a set amount per tax year in a tax-free wrapper. Gains made on shares held within an ISA are free from Capital Gains Tax. For longer-term share investors, using the ISA allowance each year is standard practice.

Stocks and indices: how they connect

An index is not a separate type of asset from stocks. It is a measurement constructed from stocks. The FTSE 100 exists because 100 companies' shares are listed on the London Stock Exchange. The index value at any moment is a calculated number derived from the share prices of those 100 companies, weighted by their market capitalisation.

When people talk about trading the FTSE 100, they mean taking a directional position on the combined movement of those 100 companies, rather than picking one. The index is a way of expressing a view on a market or economy without choosing between individual businesses. But the underlying building block is always the same: the share prices of individual companies.

Understanding stocks is therefore a prerequisite for understanding indices. If you know how share prices move, you know what indices respond to. Earnings seasons, interest rate decisions, and sector rotations affect individual stocks first, and indices second, as those stock movements aggregate upward into the index value.

For a full explanation of how major indices are constructed and traded, see our What Are Indices page.