Stocks are a key piece of most investors’ portfolios, as they typically provide higher returns than other assets over the long term. But stocks also carry more risk, and the value of a single share can fluctuate greatly in short periods. That’s why it’s important to understand how to diversify your holdings, and speak with a financial professional for guidance.
Investing in the stock market offers the opportunity to grow your wealth over time, but it’s important to understand how stocks work before you buy. A stock represents partial ownership of a publicly-traded company, and the value of that share rises or falls based on the performance of the underlying company and overall market conditions.
Companies will often issue shares of their stock in a process called an initial public offering, or IPO. Once a company’s stock is listed on the market, you can buy or sell their shares, but they won’t be selling directly to you; instead, you’ll purchase them from another investor who owns them and wants to sell, or from a market maker or exchange that manages the trading of individual stocks.
The value of a share is dictated by supply and demand in the marketplace, and prices can change dramatically as buyers and sellers negotiate a fair price. When demand for a particular stock is high, usually due to positive earnings news or investor optimism, it can boost its price. Similarly, when supply outweighs demand, which can be caused by a variety of factors including negative news or the perception that the stock isn’t a good buy, its price can fall.
Different types of stocks have different risks and rewards, and many have a niche within the investment community. For example, growth stocks generally offer the potential for higher returns than their “value” counterparts, but they can be more volatile. Likewise, stocks in resource industries are exposed to more risk than those in technology or consumer goods companies, because their prices can go up or down as a result of geopolitical uncertainty.
There are various ways to classify stocks, and the exact definitions can vary by country, but there are some common categories. For example, some markets will divide stocks by their market capitalization, which is a rough measure of the size of a company; larger companies are often classified as large-cap, while smaller firms are known as small-cap or mid-cap. There are also categories based on industry, such as technology, consumer goods or utilities; and even by geography, with emerging markets making up an important part of the global equity landscape.
While there are no guarantees, stocks have historically outperformed most other investments over the long term. But you’ll need to do your research before buying, as prices can go up or down quickly – and there are no guarantees that any stock will increase in value. For investors willing to stick with a plan over a long period of time, though, stocks can be an effective tool for growing wealth and reaching your retirement goals.