What are stocks and how do they work?
Owning and trading shares of a company
A stock represents partial ownership in a company, offering a claim on its earnings and assets. As the company's value rises or falls, so does the value of its stock.
Stocks are generally bought and sold electronically through stock exchanges, the two primary ones in the United States being the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ). While some companies sell stock directly to investors, most only sell stock through a brokerage such as Schwab. Learn more about getting started with stock investing.
Stocks use cases
Investors buy and sell stocks for a number of reasons, including the potential to grow the value of their investment over time, to potentially profit from shorter-term stock price moves, or even to earn an income by investing in dividend-paying stocks. Stocks often play a role in a comprehensive financial plan that reflects your investment horizon and the level of risk you're willing to accept in exchange for the potential upside stocks can offer.
A historical performance example of stocks in a portfolio:
Investing in stocks, particularly large-cap equity U.S. stocks, has historically provided higher returns over time in comparison to asset classes in the chart, though with increased volatility. This potential for growth is why many investors choose to include stocks as part of a long-term strategy, while also managing risk through diversification.
This chart shows how a mix of asset classes—large-cap equity U.S. stocks, moderate allocation, fixed income, and cash equivalents—have historically performed over a 20-year period. If you had invested $100,000 in large-cap U.S. stocks in 2004, for example, your investment could have grown to approximately $700,000 by 2024, despite market ups and downs. A more diversified investment portfolio would likely have had a lower return, but reduced volatility.
Understanding different types of stocks
Learn about three main types of stocks, as well as some potential advantages and considerations. Explore other security types.
Understanding different types of stocks
| Common Stock | Preferred stock | American Depositary Receipts (ADRs) | |
|---|---|---|---|
| Definition | A share of ownership in a company, investors can buy and sell whole shares and fractional shares. |
Preferred stocks (or preferred securities) combine features of stocks and bonds, potentially offering higher yields than traditional fixed income but with distinct risks. | Many non-U.S. companies trade on U.S. markets through ADRs, which are receipts for foreign shares issued by U.S. banks. ADRs are denominated in U.S. dollars. |
| Benefits | Potential for higher long-term return compared to other corporate securities. Voting rights (does not apply to owners of fractional shares). Liquidity depending on trading volume. |
Dividends are typically higher and fixed compared to common stock. Share price experiences less volatility compared to common stock. Preferred shareholders are more likely than common shareholders to recover at least part of their investment if company goes bankrupt. |
Local U.S.-based trading tends to be more liquid than local foreign markets. Investors may be able to access financial information more easily for ADRs than for direct investments overseas. |
| Drawbacks | Dividends, if available, are often lower, variable, and not guaranteed. Stock price and dividend may experience more volatility than preferred stock. Most likely to lose investment if company goes bankrupt. |
Lower long-term growth potential, if any. No voting rights in most cases. Generally less liquid than common stock. |
Exposure to fluctuations in a foreign company's local currency could affect the value of investments. Political or economic events in a foreign company's home country could potentially harm your investment. |
Trade stocks around the clock at Schwab.
Opportunities don't always wait for market hours, and neither should you. With extended trading sessions—before, after, and overnight—Schwab gives you the flexibility to act on market moves 24/5. You can count on our robust platforms and 24/7 access to Schwab trading specialists whenever you trade.
Learn about stocks essentials and how to get started.
Common questions
The stock market is where buyers and sellers come together to trade shares of publicly traded companies. When you buy a stock, you're purchasing a small ownership stake in that company, which means you may share in its profits—and its risks. The value of stocks can rise or fall based on a range of factors, from company performance to broader economic conditions.
A ticker symbol is an arrangement of letters or characters that represent securities (stocks, mutual funds, etc.) that are publicly traded. When a company makes their securities available to the stock market, it establishes a unique ticker symbol. Investors use the ticker symbol to place trades via an exchange like the New York Stock Exchange (NYSE) or the NASDAQ. Here are several ticker symbol examples: AMZN for Amazon.com Inc., AAPL for Apple Inc., and IBM for International Business Machines Corporation (IBM).
Stock quotes provide pricing information for a particular stock including the bid and ask, last-traded price, and volume of shares traded. Stock quotes show a moment in time, meaning what the stock is trading for when the stock market is open (which can be moving up or down at any given time), and the last price of the day when the stock market closes at the end of the trading day.
Yes, when you sell shares of a stock that you do not own, this is referred to as a short sale. You borrow the shares from a lender (like a broker-dealer) and sell in the open market with proceeds from the sale credited to your account. Eventually, you must purchase the same number of shares borrowed and return them to the lender–this is referred to as closing out or covering the short-sale position. You must have a margin account in order to short stock. This is not a strategy for inexperienced investors.
Small-, mid- and large-cap stocks are ways to categorize market capitalization, which is the total value of all the issued and outstanding shares of a company's stock. Very large companies like Apple and Alphabet (the holding company for Google) are considered large-cap stocks with market capitalizations starting at $10 billion. Stocks from relatively smaller companies are considered mid-cap or small-cap depending on the value of all stock issued and outstanding. Market capitalization for mid-cap stocks tends to be between $2 billion and $10 billion and for small-cap stocks between $300 million and $2 billion. As stock prices go up and down over time, market capitalization ranges and whether a stock is considered small-, mid- or large-cap changes over time as well.
Growth stocks are anticipated to grow at a rate above the average for the market. Value stocks are those that tend to trade at a lower price relative to their fundamentals. To determine whether a stock is underpriced, market analysts look at a company's fundamentals (such as dividends, earnings, and sales) relative to its current share price. Growth stocks tend to be more volatile and generally do not pay dividends.
The secondary market is where investors buy and sell stocks (and other securities such as ETFs, ADRs, etc.). The term "stock market," such as the New York Stock Exchange (NYSE) or the NASDAQ, is essentially a synonym for secondary market. In contrast to the secondary market, the primary market refers to the first time a security is created and sold to investors, such as an initial public offering (IPO).
Stock dividends are a payment in the form of additional shares instead of cash.
Sector investing is the strategy of investing across an entire sector (ex: technology, financial, consumer staples, etc.), typically using mutual funds or exchange-traded funds (ETFs).
A stock that trades for less than $5 per share and is not traded on a U.S. stock exchange is commonly referred to as a penny stock.
An Initial Public Offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. Learn more about IPOs/DPOs.
A stock split is a type of corporate action that occurs when a company's board of directors decides to divide the company's outstanding shares into a larger or smaller number of shares. Splits are a change in the number of outstanding shares of a company's stock without a change in shareholders' ownership percentage in the company. For example, with a 2:1 split, a client will receive two shares for each share owned prior to and through the open on the security's split ex-dividend (or "effective") date. Also, the share price is adjusted so the value of one's holding in the split stock is unchanged, absent any price changes post-split. An example of a reverse stock split would be a 1:10 split where a client will receive one new share for each ten shares they owned prior to the open on the security's split ex-dividend date.
Standard exchange market hours are 9:30 a.m. to 4:00 p.m. ET. After-hours trading occurs after the exchanges close. There is also a session prior to the market's open which is called the pre-market session as well overnight sessions which are available only on thinkorswim® platforms. Together these sessions are referred to as extended hours trading.
Schwab offers more ways to trade nearly 24/5 on thinkorswim with hundreds of stocks and ETFs.
Extended + Overnight trading (EXTO) hours trading session orders are eligible for continuous execution during extended hours (7:00 a.m. to 8:00 p.m.) and extended+overnight hours (24 hours) can be placed at anytime.
A fractional share represents less than one full share of ownership in a company. Schwab Stock Slices™ allows you to place an order based on the dollar amount you want to invest, so you may end up with a fraction of a share, a whole share, or more than one share.