In the same way, a company can sell a portion of itself in order to raise money. This portion is called a stock. Owning a stock means you own a piece or a share of a company, just like you contributing the chocolate chips means you own a piece of your friends’ cookie-making business. A stock holder or shareholder doesn’t actually have to run the business, but because they own a piece, they have a claim on the company’s assets and earnings.
If the company does well it may pay a dividend to the shareholders. Each stock is worth a certain amount when it is sold. That amount depends on a number of factors including how many stocks were sold in total. In your company there are four shareholders. In the real world, a company may sell millions of shares. A company may decide to reinvest its profits back into the business in order to grow the company value. Stocks can be bought, traded, or sold, on the stock market. There are many variables that determine the value of a stock in the market. A stock may increase in price and the owner can sell it for more than they bought it. But a stock may also decrease in price and then the owner will lose money.
Because the market can go up or down, there is always a risk when investing.
Parents: Reading about stocks and how they relate to business can be a great learning experience. Read What is a Stock? to find out more.