Stocks—also known as company shares or equities—are a fundamental part of many investors’ plan to build wealth. But they aren’t always well understood. This article helps to clarify what stocks are and how different types fit into an investment portfolio.
A stock is an ownership stake in a corporation. Companies issue stocks to raise money and share the profits with owners. There are a variety of reasons people invest in stocks, including the potential for growth over time; the ability to profit from short-term price fluctuations; and the possibility of receiving dividend payments, which are a portion of a company’s profits distributed to shareholders.
The price of a stock is determined by supply and demand. The market for a stock is driven by new developments in the company, expectations about future business trends and conditions in the economy, and other factors. This is why it’s important to diversify one’s portfolio by investing in a variety of stocks, from large established firms to small emerging ones.
Stocks are typically traded on a public exchange and the information about each one is available to all investors. They can be bought and sold at any time. This makes them an attractive option for investors who want to gain exposure to the global economy through an asset class that’s not tied to a particular country or region.
Investors have a wide array of options when it comes to putting their money into the stock market, from individual stocks that they research and purchase directly from companies to mutual funds and exchange-traded funds (ETFs), which help to manage risks and provide diversified exposure in a simpler way. Whether you choose to invest in single stocks or a broader array of stocks, you should be prepared for a significant amount of research and work. This includes reading and following earnings reports, news stories, analyst opinions, industry trends, and other publicly-available financial data. It also includes balancing out your risk by buying stocks across a range of sectors and geographic areas, and by investing in both growth and value stocks.
Regardless of the type of stocks you decide to buy, there are some common characteristics and considerations that every investor should understand. For example, you’ll want to consider whether the stock is classified as class A or B, which indicates voting rights and ownership control; whether it’s a blue chip, which refers to stocks in well-known companies; and whether it’s small-cap, mid-cap, or large-cap, which indicate its size.
Ultimately, the success of a stock depends on the level of its intrinsic value, which is defined by a number of metrics calculated objectively and qualitatively. These include metrics like P/E ratios, EPS, and ROE as well as company debt, equity, and sales. Moreover, a high-quality stock is likely to have intangible assets such as brand recognition and regulatory approvals that contribute significantly to its value.