Stocks are the ownership stakes in a company that investors buy and sell on a publicly traded market, like Nasdaq or the New York Stock Exchange. The value of a stock rises when the company makes money and passes some of that profit to shareholders in dividend payments. A company might also grow by reinvesting some of the profits it receives from its shareholders. Stocks are often considered a cornerstone of an investment portfolio because they have a track record of providing higher returns than bonds and cash alternatives.
Investors can buy individual stocks through brokers, financial planners and online brokerage accounts, among other avenues. The market is regulated and there are minimum requirements to trade shares, which helps keep the price of a stock in check. Aside from the potential for growth, stocks can be a source of income because they tend to pay out dividends on a yearly basis. The amount of a dividend depends on how much a shareholder owns, and companies may choose to reinvest the dividend proceeds back into growing the company.
Aside from dividends, a stock’s value can fluctuate because of changes to the company or overall market conditions. A company’s management may change, or the product might fail to perform as expected. Stocks can also be a part of an investor’s retirement plan, as many large companies offer matching contributions for employee stock plans.
As with any type of commodity, the price of a stock is determined by supply and demand. Institutional and professional investors who are trying to build a large position will bid for shares, driving up the price. Likewise, when there are more sellers than buyers, the price will decline. Aside from these factors, the stock’s value will also be influenced by the overall economy and news events.
Companies can be grouped into sectors based on their industry, such as technology or health care. Some sectors react in predictable ways to economic conditions, and investors might prefer to be less diversified within those areas unless they are choosing to do so intentionally as part of their investing strategy.
Investors can also divide stocks by the size of the company, which is measured in terms of market capitalization. These categories include small-cap, mid-cap and large-cap stocks. Very small-cap stocks, which are typically those that have little or no earnings, are known as penny stocks.
When evaluating the intrinsic value of a stock, investors should consider all of the information available. This includes the company’s financial statements, the strength of its competition, the economic environment, changes in consumer preference and advances in technology. Using just one method to value a stock is akin to a football coach knowing all the stats of his opponent, but not researching the opposing team’s decision-making process.