Stocks, sometimes called shares or equity investments, are small pieces of ownership in a company that may increase in value over time. Investors hope that they’ll make more money than they initially invested, but this isn’t always the case; companies can also lose value and even go out of business entirely. To avoid this risk, it’s generally wise to diversify a portfolio with stocks from many different companies and industries. Most employer-sponsored retirement plans, such as 401(k)s, contain some stocks, as do mutual funds, which are groups of individual stocks that are pooled together and managed by professionals.
Stocks are traded on global stock exchanges, which serve as central locations where people buy and sell them. The New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations, or NASDAQ, are two well-known exchanges. There are also other exchanges in Europe, Asia and elsewhere.
A share’s price is determined by supply and demand, and investors’ expectations about a company’s future performance. If lots of people want to buy a certain stock, its price rises, enticeing existing stockholders to sell for a profit. Conversely, if demand for a stock is low, its price falls. Investors’ expectations can be influenced by everything from the overall economy and markets to potential bad news about a particular company.
If a company does well, its stock prices may rise and investors can receive profits in the form of dividends or capital gains. Dividends are periodic payments that the company pays to shareholders when it earns a profit; capital gains are profits from selling the stock at a higher price than what was paid for it. Common stockholders also have voting rights, allowing them to vote on matters such as company policies, board decisions and mergers and acquisitions. Preferred stockholders, however, don’t usually have these rights.
The value of a share can be measured using a method known as “fair value,” which is the intrinsic value of the company’s assets minus its debts and liabilities. It can also be measured using its market value, which is the price that individuals are currently willing to pay for a share. The difference between the fair value and the market value determines a share’s price.
Investors can learn more about a particular stock by reading industry publications, such as annual reports and newsletters. They can also subscribe to trade magazines and websites focused on specific industries to monitor the latest industry news. Then, they can conduct their own fundamental analysis of a stock to recommend or set price targets for it. If the stock reaches or exceeds its price target, they can sell it for a profit and use the proceeds to fund their next investment.