Stocks are the shares by which ownership of a company or corporation is divided. Each share represents a small fraction of the ownership of the corporation. When a business goes public, it issues shares for sale to the general public. These shares are traded on a stock market, which is usually a regulated exchangeOpens Dialog, and the price of the shares fluctuates based on demand and supply. Investors buy and sell stocks for a variety of reasons, including the potential to grow the value of their investment over time or to profit from shorter-term stock price moves. Many investors also seek to earn an income from their stocks by investing in dividend-paying companies.
The performance of individual stocks varies widely, and it is important to build a well-diversified portfolio that includes stocks from many different companies and industries. In addition, investors should consider how their portfolios are taxed. Depending on the investor’s tax status, holding individual stocks may be more tax efficient than owning mutual funds or exchange-traded funds (ETFs).
If you invest in a publicly traded stock, you can expect to see the value of your shares increase over time as the company grows its revenue and profits. However, it is important to remember that the stock market can also be volatile and may cause you to lose money in some periods of time. For this reason, stocks are typically considered a long-term investment and should be a part of most investors’ portfolios.
Stocks can be grouped by size or by industry, and we often look to incorporate these groups into our overall investment strategy. For example, small-cap stocks are often best for return-focused investors who can tolerate more frequent stock price swings. On the other hand, value investors tend to favor stocks with low market prices relative to intrinsic value.
The quality of a stock’s earnings and the strength of its competitive position or perceived moat are key factors that we use to determine whether to purchase or sell shares. Revenue growth reveals how customers are responding to a company’s products or services, while earnings quality tells us how efficiently management is using the company’s resources to produce those revenues.
Stocks can also be grouped by their capitalization, which is the total value of all of the company’s outstanding shares. This is an important consideration because larger companies are often disproportionately represented by the stock markets. In particular, capitalization-weighted indices like the S&P 500 assign proportionally more money to larger companies, which can lead to overconcentration in large stocks.