Stocks, or company shares, are one of the most fundamental pieces of an investor’s portfolio. They go by a lot of different names — stocks, equity or equities, for example — but they all work the same way: Companies raise money by selling shares in their company to everyday investors to fund growth and expansion. The hope is that over time, those sales will result in a price appreciation (capital gains) that will allow shareholders to profit from their investment.
The price of a share fluctuates day to day, reflecting how many shares are being sold and bought. But over the long haul, those prices are determined by the overall success or failure of a business. If a company’s revenue or earnings grow, its stock price will rise. A shrinking company, on the other hand, will likely see its stock price decline.
There are a lot of things that can affect stock prices, including: global economic trends, the outlook for interest rates, consumer confidence and investor sentiment. A stock’s market capitalization also plays a role in its price. Typically, the higher the market cap, the larger the company is. But smaller companies can also see their stock prices surge if they’re growing more rapidly than others.
When a stock price increases, it means you’ve made a profit by selling your shares for more than you paid. That’s why it’s important to diversify your stocks. When investing in stocks, try to have a mix of growth, income and value stocks to maximize your opportunities for both dividends and capital gains.
Historically, stocks have provided the best returns of any asset class. But they’re not without risk, especially over the short term. That’s why it’s a good idea to keep your risk tolerance and capacity in mind when building your portfolio.
The main kind of stocks you buy are common shares, which represent a fractional ownership of the company. The type of share you own determines whether you’re eligible to vote in shareholder meetings or get your money back if the company fails. Other kinds of stocks exist, like preferred shares and options. But you can usually purchase shares in public companies that list them on the New York or London stock exchanges by placing a “buy” or “sell” order with your brokerage. NerdWallet writers are subject matter experts who use primary, trustworthy sources to inform their work, including government websites, academic research and interviews with industry professionals. Content is independently researched, fact-checked and reviewed for accuracy. This article is part of our How to Invest series. Learn more about NerdWallet’s editorial guidelines. If you have questions about this article, please contact us.