The stock market is the system of buying and selling shares (stocks) of publicly traded companies. The value of a share changes in response to supply and demand for the company’s products or services, its financial health, and investor outlook. Stocks typically have higher returns than lower-risk investments like bonds and cash. However, investors can face substantial risk in the short term, and stocks are not appropriate for everyone. Before investing in stocks, it’s important to understand the risks involved and your own risk tolerance and investment goals.
Many people invest in stocks as a way to earn returns on their savings. These returns can come in the form of capital gains or dividends. Capital gains occur when a stock sells for more than you paid for it. Dividends are a share of the profits that a company makes, and they can be reinvested into the company for further growth or distributed to shareholders in the form of cash.
In addition, owning stock often comes with voting rights at annual meetings and a say in major decisions like electing a board of directors. A company can also issue different classes of stock, which differ in whether or not the holder has voting rights, if there is a preferred dividend and if they receive profits or liquidation proceeds before common stockholders do.
One way to group stocks is by their total value, or market capitalization. Large-cap stocks make up 65% to 75% of the total market, while mid- and small-cap stocks represent 10% to 15%. There is no firm cutoff point between one grouping and the next, though stocks of smaller companies generally have greater potential for growth.
Stocks can also be grouped by industry. Some examples include consumer staples, energy, technology, and telecommunications. Different industries have different tendencies to react to economic conditions, and it’s important to diversify your investments to avoid being too concentrated in one sector.
Growth stocks are companies that are growing their earnings and revenue faster than their industry or the overall market. These companies usually pay out little or no dividends, as they prefer to use the income to fuel future growth. By contrast, value stocks are companies that trade for less than their financial performance and potential would indicate. Investors often believe that these companies are undervalued, and they can offer attractive returns if they’re patient.