Course → Unit 3: Stocks & Equities → Lesson 3.1

Unit 3 · Equities

What Is a Stock?

When you buy a share of a company, you're not buying a lottery ticket or a piece of paper that might go up in value for no reason — you're buying an actual legal claim on a real business, and understanding exactly what that claim entitles you to is the foundation of everything else in this unit.

Equity as ownership

A stock (also called a share or equity) represents a fractional ownership stake in a company. If a company has issued 1,000,000 shares in total and you own 1,000 of them, you own 0.1% of that entire company — not metaphorically, but as a matter of legal and financial fact. Own enough shares, and you own a majority of the company; own all the shares, and you own the whole thing outright. Most individual investors own a tiny, tiny fraction of any given company, but the principle is the same whether you own 10 shares or 10 million: you hold a proportional slice of everything the company owns and everything it earns.

Why companies issue stock

Companies need capital to grow, and broadly speaking they have two ways to raise it: borrow it (debt, covered in Unit 4) or sell ownership stakes in exchange for cash (equity). Issuing stock lets a company raise potentially enormous sums of money without taking on debt that has to be repaid on a fixed schedule with interest, regardless of how the business is performing. If a young, unprofitable company borrowed heavily instead, a rough year could leave it unable to make interest payments, risking bankruptcy. By selling equity instead, the company gets cash upfront with no repayment obligation — in exchange, new shareholders now own a piece of the company and share in its future profits (or losses) alongside the founders and existing owners. This trade-off — cash now, ownership given up — is why founders think carefully about how much equity to sell and when.

Rights of a shareholder

Owning a share isn't just a number on a brokerage app — it comes with specific legal rights, though the details vary depending on the class of share (see below). The three most important are:

• Voting rights — shareholders typically get to vote on major company matters, most importantly electing the board of directors, who in turn oversee company management. One common share usually equals one vote, so your influence scales with how many shares you hold.
• Dividend rights — if the company's board decides to distribute a portion of profits to shareholders (a dividend, covered fully in Lesson 3.3), shareholders receive a share of that payout proportional to how many shares they own.
• Residual claim — if the company is ever liquidated (wound down and its assets sold off), shareholders are entitled to whatever value remains after every other obligation — employees, suppliers, lenders, bondholders — has been paid off first. This is called a residual claim because shareholders are last in line, which is also exactly why owning stock is riskier than lending a company money through a bond: bondholders get paid before shareholders see a cent.

Common vs preferred shares

Not all shares are identical. Most individual investors buy common stock — the standard type of share, which carries voting rights and a residual claim on assets, but no guaranteed dividend; the company's board decides whether and how much to pay each period. Preferred stock is a different class of share that typically trades away voting rights in exchange for a fixed, priority dividend that must generally be paid before any dividend goes to common shareholders, and preferred shareholders also rank ahead of common shareholders (though still behind bondholders) if the company is liquidated.

Feature	Common stock	Preferred stock
Voting rights	Yes, typically one vote per share	Usually none
Dividend	Variable, not guaranteed	Fixed, paid before common dividends
Priority if company is liquidated	Last in line	Ahead of common, behind debt

Preferred stock behaves a bit like a hybrid between a stock and a bond — steadier income like a bond, but still technically an ownership stake. It's far less commonly traded by retail investors than common stock, but it's worth knowing it exists, because you'll occasionally see it mentioned in company financial statements.

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