A stock represents fractional ownership of a company, with an underlying claim on the company’s earnings and assets. Investors buy shares in companies in exchange for money, and as the company grows, its value rises, potentially allowing investors to sell their shares for more than they paid for them.
In addition to offering potential gains, stocks can be an excellent way to diversify a portfolio. As a group, stocks have historically had a positive relationship with the economy, making them a good choice for building wealth over time.
Investing in stocks can be complex, especially if you’re not familiar with the different types of stocks. Whether you own individual stocks or use mutual funds or exchange-traded funds, it’s important to understand the different types of shares so that you can make informed choices about your investments.
There are many types of stocks, and they’re classified based on the type of business they represent and other factors. For example, growth stocks are those that have been growing their earnings or revenue faster than their industry and/or the market as a whole. Preferred stocks are those that pay a fixed dividend (typically higher than common stock), and take precedence over common stock in the event of liquidation.
Aside from classification, there are a number of other factors that influence the price of a stock. These include macroeconomic trends (e.g., the strength of the economy, unemployment rates), investor sentiment, media coverage and corporate announcements.
Another factor that influences the price of a stock is supply and demand. When demand for a particular stock outweighs supply, the price will rise. Generally speaking, strong economic conditions and stable outlooks will generally drive demand up, while negative sentiment or poor performance usually drives it down.
Finally, stocks are often bought and sold on regulated exchanges such as the New York Stock Exchange or Nasdaq. While some companies offer their own stock directly to investors, the majority of shares are traded on a public market.
Investors generally purchase stocks with the long-term in mind, and they may hold them for 10 years or more before reinvesting, or selling, their shares. However, returns are not guaranteed and losses can occur, including the loss of your initial investment. It’s essential to have a financial plan and a team of professionals that can help guide your investing and retirement goals.