A stock, also called an equities, is a security that represents partial ownership of a company. When you buy a share of stock, you own a piece of the company, with each share representing a percentage of the company’s total value. People invest in stocks for a variety of reasons, from the potential for long-term growth to the ability to profit from shorter-term stock price moves or even to earn an income from dividends. No matter your goal, you can learn how to choose the right stocks for your portfolio by understanding what makes a stock tick and how the market works.
There are two main categories of stocks: publicly traded and privately held. Publicly traded stocks are what most people think of when they hear the term “stock market.” These are companies whose shares are able to be purchased and sold on highly regulated public exchanges such as the New York Stock Exchange or Nasdaq. Private markets are less regulated, with only very wealthy and/or accredited investors allowed to invest in them.
The market value of a stock at any given moment is determined by the supply and demand in the marketplace. The supply is the number of shares on offer for sale, and the demand is the number that investors wish to purchase at that time. When prospective buyers outnumber sellers, the price rises. Eventually, more sellers enter the market or leave, and the stock’s price is balanced at that point in time.
In addition to considering the supply and demand factors of a stock, it is important to consider its intrinsic value or fair value, which can be calculated using a variety of methods. One popular method is to divide a stock’s current share price by its trailing earnings per share, which gives you a stock’s P/E ratio. However, this metric can be misleading because it only looks at past performance and may not be indicative of the future.
Other ways to determine a stock’s fair value include looking at its ratios and comparing it to the stock prices of other companies. For example, you can look at a stock’s price/book ratio and see if it is trading above or below its peer group. You can also compare its price/earnings ratio to the ratios of other similar companies. However, it is important to keep in mind that any valuation method should be viewed as a tool to help you make investment decisions and not to serve as a stand-alone metric.