Stocks are ownership stakes in publicly-traded companies that give investors the potential to profit from a company’s growth. But they also carry the risk of declining in value, as well as introduce greater volatility into your portfolio than other assets. That’s why it’s important to weigh your portfolio goals, investment time horizon and tolerance for loss before investing in stocks.
To grow, businesses need capital. To raise funds, they often sell shares of their company to the public. This allows them to raise money while still maintaining control over their business operations. As demand for a company’s products rise, their stock price can go up, as do profits. When a company experiences problems, such as scandals or slow sales, the value of their stock can fall, and investors may distance themselves from the business.
Stocks are usually categorized into groups based on their size, or market capitalization. There are large-cap, mid-cap and small-cap stocks. Some are also classified as growth or value stocks. Growth stocks are associated with companies that have higher earnings growth expectations, and therefore trade at a relatively high price-to-earnings ratio. Value stocks are associated with companies that investors believe are trading below what their current profits would suggest.
When you buy stocks on the exchanges, your order goes through a matching process where your buy is matched with someone who wants to sell their share of that particular stock. Each stock has its own order book, an electronic list of buy and sell orders. The prices set on that order book can fluctuate as buyers and sellers negotiate new prices with each other.
Investors can make money from stocks through two primary sources: dividends and capital gains. Dividends are a portion of a company’s profits that are paid to shareholders, typically on a quarterly basis. Capital gains are the profits you realize when you sell a stock for more than you bought it for.
In addition to earnings, a company’s stock can be influenced by global events and economic conditions. War, interest rate changes, natural disasters and other outside influences can influence how much people want to buy a company’s products, which in turn can impact its profit trend.
The potential for higher returns makes stocks attractive for long-term investment goals, such as retirement. But it’s important to consider the risk of losing money, as well. That’s why it’s important for investors to have a diversified portfolio and invest with a financial advisor who can help you stay on track toward your goals.