Stocks are a key part of many financial plans and carry the potential for higher returns than other investments. They can also come with risk and volatility, however. That’s why it’s important to understand how they work, so you can make informed decisions about your investment strategy.
Stocks are small percentage ownership stakes in publicly-traded companies. They can be bought and sold on the New York Stock Exchange (NYSE) or National Association of Securities Dealers (NASDAQ). Companies issue stocks to raise capital from investors in order to fund projects or expand their operations. Investors can earn two types of returns from their stock investments: capital appreciation and dividends. Capital appreciation occurs when a company’s stock price increases over time, usually as the company becomes more profitable or its share of the market grows. In some cases, a company’s stock will increase in value simply because of investor optimism, even if nothing has changed internally.
The price of a stock fluctuates constantly, as buyers and sellers continuously negotiate an appropriate price for each share. The demand for a stock is often influenced by investor optimism, business forecasts and earnings outlooks, as well as general economic conditions. The fields of fundamental analysis and technical analysis attempt to understand what causes a stock’s price to rise or fall, and can help predict future prices.
Dividends are a portion of a company’s profits that are distributed to shareholders. The amount of profit a company generates, as well as the number of shares owned by each shareholder, determines how much a company’s dividend payments will be. Some companies choose not to distribute any of their profits as dividends and instead reinvest them back into the company in order to grow. However, if a company’s profits are greater than expected, this may lead to an increase in the stock price, which in turn could yield higher dividends for shareholders.
Obtaining high short-term returns is one of the main reasons why people invest in stocks. While other investment instruments like bank FDs can take years to generate substantial returns, experienced traders with a solid understanding of the stock market can leverage short-term price fluctuations to earn significant returns.
Overall, stocks are an essential part of any long-term portfolio and can be a great way to diversify your assets. However, they can also be volatile, and it’s important to understand how they work in order to make informed investing decisions. We’ve put together some helpful information to help you get a better grasp on what stocks are, how they’re traded and how they can work in your own portfolio.