Equities: What a Stock Actually Is

Equities (stocks) are the asset class most people already have some intuition for. Everyone has heard of the stock market. This chapter makes that intuition precise: what you actually own, how a company gets its shares onto a market in the first place, and the handful of numbers (market cap, P/E, EPS) that get quoted constantly without much explanation.

A share is a slice of ownership, literally

If a company has 1,000,000 shares outstanding and you own 1,000 of them, you own 0.1% of that company, a tiny, literal slice of its assets, earnings, and future decisions (each share typically carries one vote at shareholder meetings). Stock is not an abstract number that moves around; it is a legal claim on a real business.

Market cap, the single most-quoted number in equities

Market capitalization = share price × shares outstanding. If a company trades at $50/share with 20 million shares outstanding, its market cap is $1 billion. This is "what the market currently thinks the whole company is worth," and it is the number that determines whether a company gets called small-cap, mid-cap, or large-cap.

Market cap is not the same as enterprise value (EV), a concept that comes up constantly in valuation work. EV = market cap + total debt − cash. The intuition: if you actually bought the whole company, you would inherit its debt (a cost to you) and its cash (money you would immediately get back). EV captures what you would really be paying for the underlying business, independent of how it happens to be financed.

Worked example: Company X has a $2,000M market cap, $500M of debt, and $200M of cash. EV = $2,000M + $500M − $200M = $2,300M, $300M more than market cap alone suggests, exactly reflecting the net debt an acquirer would actually inherit.

How a company's shares end up tradeable in the first place

A private company's shares are not publicly tradeable. An IPO (Initial Public Offering) is the process of selling shares to the public for the first time, usually with an investment bank's ECM team running the process. This is the primary market (the company itself receives the money raised). Every trade after that, meaning you buying a share from someone else on an exchange, is the secondary market: the company itself does not receive a cent from those trades, but the trading is exactly what determines the share price the company's own performance gets measured against.

The handful of numbers everyone quotes

• EPS (Earnings Per Share): net income ÷ shares outstanding. If a company earns $100 million with 50 million shares out, EPS is $2.
• P/E ratio (Price-to-Earnings): share price ÷ EPS. A stock trading at $40 with $2 EPS has a P/E of 20, meaning investors are paying $20 for every $1 of current annual earnings. A higher P/E generally signals the market expects faster future growth (or, sometimes, that the stock is simply expensive relative to what it delivers, the same "is this justified or not" judgment call that shows up everywhere in this course).
• Dividends vs. buybacks: two ways a company returns cash to shareholders. A dividend is a direct cash payment per share. A buyback is the company repurchasing its own shares on the open market, which reduces shares outstanding, mechanically raising EPS for everyone who still holds shares, without paying anyone directly.

Reading a real price chart

A 52-week range shows a stock's lowest and highest price over the past year, a quick gut-check for whether a current price is near its highs (often read as strength or, less charitably, as "expensive") or lows (weakness, or "cheap," the same ambiguity as a low P/E). Volume, meaning how many shares traded, matters alongside price: a big price move on unusually high volume signals real conviction behind the move; the same move on thin volume is a weaker signal.