Stocks — which are also called company shares or equities — are a big part of many people’s investment portfolios. They’re often considered an important part of a diversified portfolio that can help people build wealth over time, and stocks have historically delivered some pretty impressive returns. But, just like any other investment, stocks come with risk: The value of a particular share can go up or down in the short term, depending on a variety of factors, from overall market volatility to news about a particular company.
Stocks are securities that represent fractional ownership of a company and are publicly traded. A company can issue stock to raise money and grow its business operations, or shareholders can buy shares from other investors. The type of stock held by a shareholder determines the rights and benefits he or she has as an owner, including voting privileges at shareholder meetings.
Companies typically sell their stock through a process known as an initial public offering, or IPO. The IPO process allows companies to make their stock available for purchase by anyone willing to invest in them. Shares of a company are traded on a stock exchange, which is a marketplace where individuals can buy and sell them, just like any other product.
Investors can make money in several ways with their investments, from share appreciation to dividend payments. The latter are payments that a company makes to its shareholders on a regular basis, usually representing a portion of the company’s net earnings. Companies may also pay dividends from retained earnings or proceeds from asset sales.
Share appreciation happens when the price of a share rises over the course of time that you own it, and it allows you to sell your shares for more than you bought them for. This is the most common way that stocks can grow in value, and it’s a main reason why people choose to invest in them.
The long-term performance of a stock is largely determined by the quality and growth potential of the underlying company. This is why it’s important for investors to spend time researching and building a narrative about the companies in which they invest, so they can understand what drives a stock’s long-term return potential. For example, a stock’s “fair value” reflects its intrinsic value based on a company’s fundamentals; however, its market value is influenced by demand and other variables, and it can sometimes diverge from that fair value. Regardless of what causes its market value to change, the ultimate goal is for the company to be profitable and continue to grow. This ultimately benefits all shareholders in the long run.