As a fundamental building block of an investment portfolio, stocks represent ownership interests in businesses that choose to make their shares available for public purchase and sale. Also referred to as equities or equity securities, these shares give investors a proportional claim on the company’s net assets and future earnings. The price of a stock can rise or fall as investors change their perceptions about the company’s prospects or economic conditions. A number of things can impact a stock’s price, but over the long term, a company’s performance remains the main driver.
Historically, stocks have been among the most attractive investments available, providing higher returns than bonds, real estate and commodities. However, they also have a history of high volatility and should be considered long-term investments. Many people buy stocks to grow their savings and achieve financial goals like retirement or education. In general, when a company’s profits increase, its stock price tends to rise. Conversely, when a company’s losses increase, its stock price will drop.
Many stocks pay dividends, which can be used to offset some of the price fluctuations in a portfolio. Investors can receive these dividend payments in cash or reinvest them to earn additional returns. Many people buy different stocks in companies large and small across a variety of industries to help mitigate risk by diversifying their economic exposure.
Some investors prefer to categorize stocks by their geographic location, based on the country in which they are headquartered. However, this designation doesn’t always accurately reflect the company’s business operations and sales, as many large multinational corporations do a significant amount of their business outside the United States.
Another way to categorize stocks is by their industry. Companies are grouped into sectors such as information technology, consumer discretionary and telecommunication services. When the economy slows, demand for products and services from these types of companies may decrease. Companies in consumer staples and utilities typically have less exposure to economic cycles.
Companies are also categorized by their size and capitalization. This helps to differentiate between emerging growth companies and more established, stable businesses. The larger a company, the more stable its share price and revenue tends to be.
Finally, some investors use a technique called short selling to speculate on a decline in a stock’s price. This involves borrowing the shares from a broker or a financial institution and then repurchasing them later at a lower price. The price at which you repurchase the shares will determine whether you make or lose money. Shorting is not suitable for all investors and comes with some risks. For this reason, it is important to carefully consider a short-selling strategy before implementing it.