How do stocks function?

Stocks function by providing ownership shares in a company, which means that when an individual purchases a stock, they are buying a small piece of that company. This ownership can lead to various benefits, such as voting rights in company decisions and a claim on a portion of the company's assets and earnings. As the company grows and becomes more profitable, the value of its stock can increase, allowing shareholders to sell their shares for a profit.

Furthermore, stocks can also yield returns for investors through dividends, which are payments made to shareholders from the company’s profits. This potential for capital appreciation and income generation makes stocks an essential component of personal finance and investment strategies for individuals looking to build wealth over time.

In contrast, the other choices do not accurately depict the nature of stocks: they are not bonds, they are not merely cash reserves, and they have the potential to yield returns, contrary to the incorrect assertion that they cannot.