Stocks are shares in the ownership of a company, giving investors partial ownership of a business and a claim on its earnings and assets. The value of a share fluctuates throughout the day, reflecting supply and demand for the business. Ultimately, those who hold stocks over the long haul can make money in two ways: through capital gains and through dividend payments.
The stock market is a mechanism that distributes control of some of the world’s largest companies among hundreds of millions of individual shareholders. The market allows buyers and sellers to negotiate prices and maximize fairness for both, based on supply and demand. Stocks are listed on regulated exchanges, such as the New York Stock Exchange and Nasdaq. Companies can also issue different types of stock, including those with enhanced voting rights or priority to profits or liquidation proceeds. Not all stocks are created equal, and some may not be available to the general public (e.g., those with restricted voting rights).
Investing in stocks can help you achieve your financial goals, but the key is to build a well-rounded portfolio with other investments. When you buy a stock, you’re betting that the company will grow and be able to pay more than its current share price. But remember that even a great company can lose its value or go out of business entirely, so be prepared for ups and downs in your investment.
Investors earn returns on their stock by selling it for more than they paid, or through dividend payments, which are regular payments to shareholders from the company’s profits. Most common stocks pay quarterly dividends, though some, such as energy companies, may pay less often or not at all. While some people use their investments to meet short-term income needs, most people hold stocks as part of a long-term savings plan.
One of the most significant advantages of owning stock in a publicly traded company is limited liability. That means that if the company goes bankrupt, you can only lose the amount you paid for the stock, not your personal belongings or other assets. This is in contrast to other forms of ownership, such as partnerships or limited liability corporations, where the owners can be personally liable for any unpaid debts if the partnership fails.
There are many different types of stocks, and investing in them can be complicated. But the most popular are common stocks, which allow you to participate in the success of large publicly traded companies. Depending on how established the company is, you can make money through capital gains, where you sell the shares for more than you paid, or through dividends, which are regular payouts from the company’s profits.
The best way to find a stock that matches your investment horizon and risk tolerance is to create a comprehensive financial plan, review your investment horizon and then allocate a percentage of your portfolio to stocks. NerdWallet is here to help with a full library of resources on stocks and how they work.