Investing in Stocks


Stocks are a core part of most investors’ portfolios. Also known as shares or equities, stocks represent ownership stakes in public companies and come with the potential for earnings in the form of dividend payments and capital gains. These returns are crucial to long-term wealth building, but they can also be volatile and expose you to the risk of near-term losses. With the right knowledge, you can make informed decisions about the stocks you hold and when to sell.

A stock is an equity stake in a publicly-traded company that chooses to offer its shares for sale to the general public. This makes it possible for you to buy a small piece of the business and potentially benefit from its success. When a stock is sold, its price may rise in value and you can then sell it for a profit. As a shareholder, you may also have voting rights on key company decisions such as management changes and acquisitions. Typically, common stockholders have the right to vote on these matters; however, preferred stockholders often do not have these privileges.

Companies issue stocks to raise extra funds and give investors a stake in their assets and future profits. These assets are traded on the public market, which opens them up to the scrutiny of investors and regulators. It is for this reason that many private companies do not choose to go public; doing so may expose them to greater risks.

As a long-term investment, stocks have offered historically high rates of return (capital appreciation) and have the potential to provide income in the form of dividends. They can also be used to offset inflation. The key to successful investing is to understand the fundamentals of the economy and have a well-diversified portfolio.

The stock market’s price movement is driven by supply and demand, which can be influenced by economic factors as well as individual company performance. When the supply of a stock exceeds the demand at any given moment, its price will fall. Conversely, if the supply is limited and demand is higher, its price will rise. The fields of fundamental and technical analysis are used to study the underlying causes of these movements in order to understand why they occur and try to predict their direction.

The underlying reason behind any change in a stock’s price is the profit that investors receive when they sell it for more than they paid for it. This profit is referred to as a capital gain and can be a great source of wealth building. Other sources of profit include dividend payments and interest payments. When the stock price falls, this is referred to as a capital loss and can be a significant financial setback. From time to time, you might find it necessary to sell stocks in your portfolio for a number of reasons including maintaining diversification among sectors, limiting overconcentration in certain positions, or as the overall objectives of your investment plan change.

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