What do stocks represent?

Stocks represent ownership in corporations. When you purchase stocks, you are essentially buying a share or a piece of that company, which entitles you to a proportionate claim on the corporation's assets and earnings. This ownership stake can lead to various benefits, such as the potential for capital gains as the value of the company increases and receiving dividends if the company distributes profits to its shareholders.

Understanding that stocks signify ownership is crucial for anyone involved in investing or financial counseling, as it forms the basis for how equity markets function. Stocks are fundamentally different from debt obligations, which are loans that companies must repay, and they are not investment contracts that promise fixed returns. Additionally, stocks should not be confused with guaranteed savings accounts, which offer a set interest rate and principal protection. The nature of stocks as ownership stakes explains their volatility and the potential for both higher risks and rewards compared to other financial instruments.