Stocks are an important part of most people’s investments, and they can be a great way to help build wealth over time. However, the stock market can seem intimidating, especially if you’re new to investing. Understanding what stocks are, how they work, and why you should invest can make the idea of investing much less daunting.
In a nutshell, stocks are securities that represent fractional ownership of a company. Companies issue stocks to raise money, called capital, for expansion projects or other business needs. Companies can also sell their shares to investors for a profit. Over time, stocks typically grow in value more than other types of investments such as bonds and interest-bearing bank accounts.
Companies issue different classes of stock, such as common or preferred, to raise capital for specific purposes. Investors then purchase and sell those stocks on a daily basis through a marketplace known as the stock market. These thousands or millions of trades are conducted electronically, usually within seconds. A buyer and seller each offers a bid price and an ask price, and when the prices meet, a trade occurs.
Stock market growth is driven by supply and demand, as well as a company’s ability to grow revenue and profits. A successful business can create wealth for its shareholders, while a failing business can have the opposite effect. However, the stock market is not a guaranteed way to make money or protect your retirement savings.
The stock market is a dynamic system that signals to businesses which investments are likely to be successful, helping to direct resources toward the most productive enterprises. It also helps ensure that any losses incurred by a company will be offset by gains made by other investors, making the overall economic process more efficient.
While it’s possible to lose money when owning stocks, over the long-term stocks are a better option for those saving for retirement or building their wealth than other types of investments such as bonds and cash. While stock prices can fluctuate wildly from day to day, over the years they generally trend upward.