Stocks are partial ownership of a public company and come with the potential to make you rich or cost you money. They offer investors a chance to participate in the financial success of companies and can help you outpace inflation over time, but they also tend to have higher risks than other types of assets. The key to investing in stocks is understanding how the market prices them, what they represent and what makes them unique from other forms of ownership.
When people talk about stocks, they are usually referring to common stock. These are shares that are issued by companies and listed on the New York Stock Exchange or Nasdaq. The stock market is a collection of investors who buy and sell shares to each other, and this activity drives the price of the share up or down.
Companies issue stock in order to raise money, and they can use the funds for a variety of purposes. The most obvious use is to pay off debt, but the company might also use it to fund growth that they cannot or would rather not finance with additional loans. In addition, shareholders can make money through share appreciation and dividend payments.
Unlike the joint-stock company that was first established in the 1600s, today’s limited liability companies have much more formalized ownership structures. When a private company wants to go public, it will usually hire investment advisors to prepare an initial public offering (IPO) that lists the number of shares and the initial IPO price. Once the IPO is completed, the shares can be traded on the stock market, and their prices rise or fall depending on a number of factors.
Investors are interested in acquiring stocks because they can potentially provide higher rates of return than other assets, like bonds. The higher returns they can provide are a result of companies growing their revenue and profits, which in turn causes the value of the company’s shares to rise over the long term.
As with all investments, however, the risk of losing your investment is real. The stock market is volatile, and the value of a stock can be affected by a number of different factors, including changes in economic conditions, government policies, interest rate directions, and the overall outlook for certain industries.
Besides the quantitative metrics, like P/E ratios and P/B ratios, that are used to assess stock value, investors may also look at qualitative strengths and weaknesses when evaluating companies. For example, companies with defensible economic moats and large user bases could be more valuable than those with less-stable business models or weak brand recognition.