What Are Stocks?


Stocks are the shares by which ownership of a corporation or company is divided. A single share of the stock represents fractional ownership of the corporation, and its value is determined by the market. The value of a stock can go up or down, depending on market forces and the financial health of the company.

Investors buy stocks for two reasons: income and capital appreciation. Income is received from dividends, payments made to shareholders out of a company’s profits; and capital appreciation occurs when a stock’s price increases from the time it was purchased. Most investors build diversified portfolios that include both types of stocks.

While stocks are an important part of a well-diversified investment portfolio, it’s worth remembering that they have historically generated lower returns than other asset classes over the long term, especially when they’re volatile like they can be in short bursts. For that reason, it’s essential to develop a comprehensive financial plan and invest according to your goals, risk tolerance and investment horizon.

Most people own common stocks, which give them the opportunity to participate in a company’s success and can boost their wealth over time. In general, however, the term “stock” is used to refer to any type of share that gives you part ownership in a public company. This can include stocks, bonds, mutual funds, real estate, commodities and other assets.

The value of a share is determined by the market through buying and selling activity, which takes place on a stock exchange, such as the NYSE or Nasdaq. In order to make a stock more accessible to the investing public, companies can conduct stock splits, which don’t change the company’s market capitalization but increase the number of available shares.

A stock’s price can be affected by a number of factors, including the growth rate of the economy, interest rates and the company’s performance relative to competitors. Over longer periods of time, however, stock prices tend to track corporate profit trends.

In order to determine the value of a stock, analysts use an analysis known as intrinsic value, which combines a number of qualitative and quantitative measurement factors to try to discover the true value of a company. This can lead to a degree of subjectivity, as different analysts will weight factors differently. For example, an analyst may consider profits to be more important than management quality in determining value, while another might place more emphasis on revenue growth or the company’s reputation in the industry.

Once a company is public, its stock can be traded on a stock exchange, which lists the purchase or bid price and the selling or offer price. Companies often issue shares of stock in their initial public offerings (IPOs), after which they are traded on the open market, allowing anyone to buy and sell them.

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