How Stocks Work

Stocks are an integral part of many people’s investment portfolios. But stocks also come with the potential for higher losses than other types of investments like bonds or real estate, so it’s important to understand how they work. In addition to understanding how they fit into an overall investment plan, investors can use this knowledge to make informed decisions about when to buy or sell.

A stock is an ownership share of a company. Corporations issue stocks to raise money for business expenses, such as designing new products and hiring more people. When companies perform well, their shares can rise in value, allowing them to pay out profits to shareholders. Investors may be attracted to the growth potential of stocks because they provide an opportunity for higher returns than other types of investments.

Companies may choose to go public by listing their shares on a marketplace, such as the NYSE or Nasdaq. When companies are publicly traded, they become accessible to everyday investors and may be subject to more regulatory oversight. Investors can buy and sell shares of publicly traded companies, which are referred to as securities, through brokerage firms and invest apps.

When a company’s share price is high, it may indicate that the market sees strong demand for its product or service. This can lead to a long-term increase in the company’s share price and profitability. On the other hand, if the economy is struggling or the company’s earnings are weak, it could lead to a decline in the stock’s price.

There are many different ways to categorize stocks. One common way is by size, which is measured by a company’s market capitalization, or the total value of all its shares. Another way is by industry, which groups companies into categories like information technology and consumer discretionary. Within each sector, individual companies can be further categorized by their business model or revenue source.

Stocks can also be grouped by their trading style, which is the way that a company trades on the market. Companies that tend to trade in volatile markets, with large daily price changes, are often considered to be more risky.

Ultimately, the value of a stock can be affected by both macroeconomic trends and events, as well as investor sentiment. For example, a weakening economy could cause businesses to cut costs and lower their sales, which would affect their earnings and ultimately the share price of their stocks. A company that receives positive or negative media coverage might also experience a shift in stock prices.

Ultimately, the best way to approach investing in stocks is with a financial plan that considers your financial goals and your tolerance for risk. Your Edward Jones advisor can help you create a plan that’s right for you. Contact us for a complimentary consultation.

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