The stock market is a place where individuals buy and sell fractional ownership in publicly-traded companies. The market spreads control of the world’s biggest companies among millions of investors, who trade them on exchanges like the New York Stock Exchange and Nasdaq. Stocks are a common investment vehicle for people with investing experience and a willingness to take on some risk.
Stocks give you a stake in the fortunes of a company that can grow over time, boosting your return on investment. That growth can come from two main sources: capital appreciation and dividends. Capital appreciation occurs when the value of your shares rises over time as the company becomes more profitable or experiences a surge in investor confidence.
A common way to categorize stocks is by the size of the company that they represent, as shown in their market capitalization. Shares of larger companies are often referred to as blue chip stocks, while those of smaller companies are known as penny stocks. The market also splits stocks into sectors such as technology, energy and financial services.
Purchasing and selling stocks is done through a broker, who acts as the middleman between buyers and sellers. Each stock has a purchase or “bid” price and a sale or “ask” price, with the difference between these prices being called the bid-ask spread. The bid-ask spread reflects the market’s demand for a particular stock, which is typically determined by how much investors are willing to pay and how much they are willing to accept in return.
The price of a stock is also determined by supply and demand, with the demand for a particular share being influenced by how well other investors think that the company will perform in the future. This forward-looking nature of the stock market contrasts with some economic data, such as employment figures, that look backward at what has already happened and tend to lag behind how businesses actually behave.
While buying and holding stocks can be a great source of growth for your portfolio, they can also be highly volatile. This can be nerve-wracking for some investors, especially those with a low risk tolerance. It’s important to understand the potential for losses before diving into the market, and to make sure that you have a solid plan for how to manage your investments.
Another key advantage of stocks is that, if held long term, they offer a tax benefit. As long as you don’t sell your shares, you will not owe taxes on any gains that you accrue from owning them, and only the income that you receive from dividends will be subject to taxes. This is an attractive feature for anyone who is looking to invest for the long haul. However, this is something that you should discuss with a tax professional to ensure that you’re getting the most from your investments. Compare top investment brokers side-by-side with NerdWallet’s tool.