Stocks, company shares or equities, are an important part of many investors’ financial portfolios. They are one of the main assets that people use to grow their savings and plan for long-term goals, like retirement and education costs. But stocks are also a major source of risk, and the value of individual stocks can go up or down, depending on market trends. Investing in different types of stocks can help mitigate this risk by diversifying your holdings across the economy and across industries.
But before you dive into the market, it’s crucial to understand how different kinds of stocks work, and what their pros and cons are. The most basic kind of stock is common stock, which represents partial ownership in a public company. These stocks are typically traded on public exchanges, such as the New York Stock Exchange or Nasdaq, and can be bought and sold through brokerage accounts. Public stocks give shareholders the opportunity to make money by allowing them to participate in a company’s growth and profits.
When a company goes public, it opens itself up to the general public for investment opportunities, which can increase the company’s revenue and lead to growth in its share prices. However, it can also expose the company to greater regulatory pressures and investor scrutiny.
A stock’s price can be driven up or down by a variety of factors, including the macroeconomic environment, interest rates, and currency fluctuations. Historically, stocks have delivered higher returns than bonds and cash, but they can also experience large losses.
In addition to these global market trends, the performance of a particular stock can depend on its industry and the company itself. Small-cap stocks, for example, can offer outsized returns but carry more risk than larger companies. In terms of industry, you can classify stocks by sector, such as technology, industrials, or financials. Investors can also look at size by investing in large-, mid-, and small-cap companies or by looking at a company’s market capitalization, which refers to its total dollar value.
Companies can also pay dividends to their shareholders, which can be a source of additional income for investors. This is a percentage of the company’s profit that is distributed to shareholders, or re-invested in the business. Not all companies are able to pay dividends, and the amount that can be paid is typically determined by a company’s earnings and assets. Stocks can also be divided by share class, which can have unique characteristics such as voting rights or priority in receiving profits and liquidation proceeds before other classes of shareholders. These share classes can have an impact on the price of a stock, as demand for certain shares can be higher or lower than other share classes.