When people invest in stocks, they buy a small part of a company. They hope those shares will gain value over time and they can sell them for more than what they paid to own them. Stocks can also pay dividends, which are periodic payments that companies make to shareholders from their profits.
Many things can influence a stock’s price, from market volatility to news reports. But a stock’s fundamental value is determined by the quality of its products or services, its financial stability and its competitive advantages.
A company issues new shares of stock to raise money to grow its business through designing new products, hiring more employees and expanding into other markets. When individuals buy those new shares, they’re called shareholders. Owning a stock doesn’t mean that you carry much weight within the company or rub elbows with its management team. Instead, shareholders rely on the decision-making structure of their board to help them profit from the growth of the company’s business and its stock’s value.
Stocks are traded on the primary market and over-the-counter, and there are several major stock exchanges in the world. These serve as central locations where investors can trade shares of different companies. The NYSE and Nasdaq are two of the more prominent exchanges. The exchanges have rules and regulations that ensure a fair trading process and provide real-time information about prices to traders.
Investors evaluate a stock’s value by looking at its P/E ratio (price to earnings per share) and other valuation tools, such as price-to-book ratio. They also monitor mergers and acquisitions in the company’s industry and may consider its ability to generate cash flow from operations. Some investors are also guided by the principles of legendary investor Benjamin Graham, who developed a model that uses the company’s sales, book value and earnings to determine its intrinsic value.
There are several different types of stocks, and each carries its own risks and rewards. For example, preferred stocks are issued without voting rights and may take precedence over common stock in the event of liquidation. And while stocks have a long history of offering high returns, it’s not uncommon for a particular stock to lose value in a short amount of time, sometimes due to unforeseen events.
Because of these inherent risks, investing in stocks should be considered a long-term commitment. An experienced financial advisor can help you understand the pros and cons of stocks and determine how much of your portfolio to devote to them based on your investment goals, investment horizon and the level of risk that you’re comfortable accepting in return for potentially higher returns. In addition, an advisor can help you develop a comprehensive financial plan to guide your investments and ensure that you have the right amount of savings to cover your living expenses and retirement needs. This is important, especially in a volatile market where it can be easy to get caught up in the excitement of watching your money grow or decline second by second on a computer screen.