A stock is a partial ownership stake in a company, including a claim on the firm’s earnings and assets. When companies grow, the value of their stocks rises. When they decline, their values decrease. As with all investments, the return on stocks fluctuates. But, long term investors have seen impressive returns from stocks that outperform other asset classes like bonds and real estate.
There are two primary ways to make money from stocks: capital gains and dividends. Capital gains occur when you sell shares of a company for more than what you paid for them. You also earn dividends when a company makes payments to shareholders from its profits. Companies may choose to pay dividends regularly or at random.
While the stock market is a complex system, the basics are simple. Stocks are traded through public exchanges, where buyers and sellers interact over the course of the trading day. There are numerous national and international exchanges where you can buy and sell stocks. The two most well-known exchanges in the United States are the New York Stock Exchange (NYSE) and the Nasdaq.
In addition to buying and selling, the stock market also provides information about companies. The price of a stock fluctuates as supply and demand change. When there are more buyers for a particular stock than sellers, the price will increase. When demand is weak and the company’s outlook is uncertain, the stock price will decrease.
The stock market can be highly volatile, which is why it’s important to diversify your investments and keep your risk tolerance and capacity in mind. Investors who are comfortable taking a little more volatility in their portfolio in the hopes of higher returns should consider adding some stocks to their holdings.
Stocks are typically bought and sold electronically through a broker. The process is transparent and allows investors to see prices in real time. The stock market is a global marketplace and can be accessed by anyone with a computer or mobile device and a brokerage account.
Investing in stocks is not guaranteed to make you rich, but it has historically outperformed other asset classes. As a result, many people use it as a part of their retirement strategy and as an additional source of income.
Investing in stocks can help you achieve your financial goals, but it’s important to understand how they work and the potential risks involved before getting started. If you are unsure of how to start investing in stocks, read NerdWallet’s How to Invest in Stocks guide for more information.