Stocks—also known as shares, equity, or equities—are a common form of investment and are an important part of many people’s plans to build wealth. While investing in stocks can seem intimidating, a little knowledge goes a long way towards understanding how to make it work for you.
Companies issue stocks to raise money and give investors a stake in their growth. A single share of stock represents a fractional ownership claim in the company, and its value tends to reflect the company’s earnings experience, going up during profitable periods and down during losses. Stocks are generally regarded as having a higher potential rate of return than fixed-income securities like bonds. However, they come with a greater degree of risk as well.
Investors can profit from owning stocks in one of two ways: by receiving regular dividend payments or through capital appreciation. Some companies choose to reinvest their profits rather than paying them out as dividends, and these stocks are often called growth stocks. Others pay out dividends at regular intervals and are sometimes called income stocks. Regardless of which type of stock an investor owns, the ultimate goal is to generate a return on their initial investment.
The price of a stock fluctuates as investors and traders assess its intrinsic value and compare it to other stocks on the market. This assessment is generally divided into the fields of fundamental analysis and technical analysis. Fundamentals are the underlying economic, business, or political factors that affect the price of a stock. Technicals are the charts and indicators that are used to identify a trend or predict future price movements.
There are several different categories of stocks, based on their size and industry. For example, large-cap stocks are shares of established, stable companies with a proven track record. Small-cap stocks, on the other hand, represent shares in companies that are less established and may have a high growth potential but also a greater risk of losing their value. In addition to dividing the market into these categories, stocks are also classified by their earnings history and current performance.
Most developed countries have a formal stock exchange, where shares are traded. In some cases, these markets are regulated by an independent organization and have strict requirements for new listings. There are also loosely regulated over-the-counter (OTC) exchanges that list shares of smaller companies that don’t meet the requirements of larger exchanges.
Investors can purchase and sell stocks through a broker, which is an individual or firm that specializes in buying and selling shares of stock on the market. These brokers can be found in most major financial centers around the world. Most brokerage firms provide online trading platforms to facilitate trades. When a trade is completed, the broker will send the investor a confirmation of the transaction and will notify the appropriate authorities in the event that any fraud or illegal activities occurred. The process of buying and selling shares is also facilitated by market makers, which are companies that buy or sell large numbers of shares on behalf of their clients.