Stocks are a way to own part of a company. If the company performs well and grows, the stock’s value may also rise. Investors who hold stocks over the long term are generally rewarded with strong returns. However, the potential for a loss is also high. The key to successful investing is determining your financial goals and risk tolerance.
Historically, companies raised money by selling shares in their businesses. This is known as the primary market and still occurs in some cases today, but is not as common as it once was. Today, most stocks are bought and sold in the secondary market on exchanges or over the counter.
If you own common stock, you get voting rights that allow you to have a say in the major changes a company might want to make. But owning a share of stock doesn’t give you a parking spot in the company lot or the right to rub shoulders with company bigwigs.
There are different categories of stocks based on the size of the company that issues them, including large-cap, mid-cap and small-cap. The smallest companies issue shares that are sometimes called “penny stocks.” Shares of these smaller firms usually don’t pay dividends, which is when a company gives a portion of its earnings to shareholders.
Many investors choose to diversify their portfolios by investing in a variety of different types of stocks. This helps reduce the risks associated with a single investment. For example, investing in blue chip stocks is a way to get exposed to well-established and financially sound businesses that have demonstrated their ability to endure economic ups and downs. These include large corporations such as Johnson & Johnson, Coca-Cola and Procter & Gamble.
You can find information about individual stocks on a number of websites. Some are free and provide market data, while others charge a fee to access proprietary research from analysts at brokerage firms or “household names.” The Securities and Exchange Commission and state regulatory agencies oversee the U.S. stock market.
A stock’s price fluctuates based on supply and demand, with investors looking to buy shares that are priced low or sell shares they own at high prices. The fields of fundamental and technical analysis seek to understand the conditions that drive stock prices and predict future price levels.
The key to successfully investing in stocks is understanding your financial situation, including your risk tolerance and financial goals. A financial professional can help you determine if stocks are the best choice for your situation and recommend strategies for investing in the stock market. You’ll also want to consider how much you can afford to invest, whether you are starting with a lump sum or investing in smaller amounts over time. Many financial planners recommend paying off high-interest debt, such as credit card balances, before investing in stocks. This will allow you to reap the returns on your investments without the additional burden of interest payments.