Stocks represent partial ownership in a public company, offering a claim on the company’s earnings and assets. They are bought and sold through exchanges, the most popular being the New York Stock Exchange and the National Association of Securities Dealers Automated Quotation System (NASDAQ). While stocks can offer prospects for long-term capital appreciation, they can also lose value over time. Understanding how stocks work within a portfolio can help reduce their risks and volatility.
Investing in stocks can be an important component of a financial plan, providing the opportunity to potentially earn higher returns than other asset classes. However, the risk of loss is greater with stocks than other investments. Stocks may rise and fall in value, even over extended periods of time, depending on factors like investor sentiment, market volatility, economic conditions and individual company performance.
When companies grow, their stock prices usually rise, and when they shrink, their share price typically falls. The overall performance of stocks, however, is a function of the long-term business trends and expectations of the market.
The price of a stock fluctuates according to demand and supply, just as any other commodity does. When demand for a particular stock increases, often due to favorable news, a positive profit outlook or investor optimism, the price tends to rise. Conversely, when supply outweighs demand, which can be driven by negative news, a poor profit outlook or investor pessimism, the price tends to fall. This constant flux in demand and supply is the essence of the stock market’s price discovery process.
A company issues stock in order to raise money, and investors then buy those shares to become partial owners of the company. The company can then use those funds to expand its operations and pay dividends to shareholders. Some companies distribute dividend payments to their shareholders on a regular basis, while others do so only when the company generates sufficient profits.
Shareholders generally have voting rights tied to their stock, influencing choices like selecting board members and certain corporate actions. The scope of these rights, as well as the type of shares, vary by company.
While there are a variety of ways to invest in the stock market, most people buy and sell stocks through a broker or online brokerage. This can make it easier to purchase or sell shares at any point in the day, and also makes it possible for small investors to participate in the market without buying entire blocks of shares.
Historically, stocks have been among the most profitable investment vehicles for those who stick with them over long periods of time. As a result, many investors view them as the cornerstone of their investment portfolios. But, the potential for high returns with stocks comes with an increased level of volatility, so it’s important to understand how they work in order to mitigate their downside risks. In addition, it’s vital to develop a comprehensive financial plan that includes your investment horizon and the amount of risk you’re willing to take on.