What is stock

One thing I've noticed time after time is that some people simply do not understand what stock really is. You hear pundits declaring that people who own stock "didn't do the real work", or are otherwise some form of deadweight, or unnecessary part of the economy.

While I won't argue Wall Street does some dumb things, I do think that the stock market plays a huge role in making a successful economy and is almost required to have the rising standard of living that exemplifies the modern world.

First, a simple English definition of what stock really is from a few perspectives.

1. Stock is ownership of a company. When you buy newly issued stock you are contributing resources that were your own into the company's use. Without going into a detailed discussion of capital, this means that without stock (or, alternatively, debt) the company could not obtain the workers or equipment - there would be no money to pay employees or buy supplies. When you buy existing stock you are preventing the need to liquidate successful companies for owners that need the cash.
   
2. Stock is a way to make ownership liquid. There are lots of small, one person businesses in the world. However, assume that I own Stolid's Auto Repair in full - it is a functioning, profitable mechanic's shop. But I have a child I wish to send to college and the costs are higher than I have funds for - without stock I would have to either take the burden of debt or sell my shop (something I might be loathe to do!) - however with stock I am able to sell portions of the company's profits to someone else. This doesn't carry the risk of debt (with debt, I have to pay it back whether the shop is successful or not, with stock I do not), and lets me keep control of the company if I keep most of the stock. It also means that the person who bought the stock from me can sell it to someone else when he needs his child to go to school.
   
3. Stock is the way that a company's profits are distributed to those that allowed the profits to occur. This explanation has two parts. The first is that without the stock holders, the company would not have had the money to attempt to fulfill people's needs and wants - and if there is a profit then there are customers so the company must be making lives better. In exchange for helping others the company receives an economic boon in the form of profit. The company can then opt to return this boon to those who organized the resources in a way that had more benefits with less cost than the alternatives - which is to say, the stock owners. The term for this payout is 'dividend'.
4. The company also has the choice to 'retain earnings' - this means keeping the profits instead of putting them in a dividend. Usually this is because the company feels, long term, it can grow larger in an efficient way. For example, if Stolid's Auto Repair wanted to open a second location on the other side of the city, it would usually retain earnings to do so

So what does this tell you?

1. A stock's value consist of 2 things:
1. The resources the company controls - if Stolid's Auto Repair owns a building, repair equipment, etc. then even in a worst case scenario these could be sold and the proceeds, after paying any debts, would be distributed to the stock holders.
2. The value of the dividends the stock pays out, discounted by the 'time value of money', which is basically that money now is more valuable than money in the future. This is related to the economic idea of time preference.
2. Stock holders bear several duties that are economically important.
   1. They provide the raw resources that will fund the company at their own deprivation (I could buy stock, or I could go buy that shiny new TV!)
   2. They also bear all the risks for their own decisions. When a loan is made there is some risk of not being repaid if things go badly, but they get 'first dibbs' on the resources a company controls if it fails. Stock holders are basically the last in line, and thus bear the most risk of failure. In return, they have the largest potential for gain. If they did not have this potential, why would anyone buy stock rather than loan money?
   3. Stock purchasers have the duty of evaluating how efficient a company is at using it's resources. Imagine if "Emotional Auto Repair" and "Stolid Auto Repair" have, essentially, the same resources - number of garages, tools, mechanics, and so forth - but for whatever reason Emotional's stock is trading lower than Stolid's. That is a sign that, in some way, Stolid's shop is either geared better to grow in the future or organized more efficiently which will lead to more profit later. Without this capability a company could only be evaluated in the past, but with the market you can get an idea of where a company is going (this is why the market is often called 'forward looking')