Stocks—also known as shares, equities or securities—are an important part of many investors’ wealth-building plans. But they can be complicated and may not be well understood. This article aims to shed some light on stocks, how they work and what kinds of benefits investors can expect from them.
A stock is a partial ownership stake in a company. It represents a claim on the company’s assets and earnings and is bought and sold in exchange markets. As a result, stock prices can be volatile. But for those who are willing to hold on over the long term, stocks can provide higher returns than other investments, including bonds and cash.
Companies issue stocks in order to raise money, and investors buy them with the expectation that their value will increase over time. If the company is successful in growing its business, its stock price rises and investors can sell their shares for more than they paid for them. This is known as capital appreciation and can help investors grow their wealth and potentially outpace inflation over time.
Depending on the type of stock, investors can also receive dividends. These are payments made to shareholders from a company’s profits, and can be used as a source of income, or re-invested into the business to generate more growth and further increase their return on investment.
However, owning a share of stock does not mean that you carry any weight within the company or that you get to rub shoulders with the company bigwigs. While a company’s stocks are a claim on its assets, the amount that a shareholder receives in the event of liquidation will only be as much as what is left after the company has paid its employees, suppliers and creditors, maintained its facilities and paid its taxes.
Different types of stocks exist, with the most common being common stock that comes with voting rights and pays dividends. Investors can also invest in preferred stock, which works a little differently and typically has lower dividends than common shares.
A stock’s price at any given moment is determined by the laws of supply and demand. If there are more buyers than sellers, the stock’s price will increase. Conversely, if there are more sellers than buyers, the stock’s price will decrease. At any given point, the price of a stock is the product of its fair value and the market’s demand, which can be influenced by many factors, including macroeconomic trends and investor sentiment.