Stocks, also known as equities, represent partial ownership of a publicly traded company. Companies raise money, often referred to as capital, by selling shares of their stock. These are called initial public offerings or IPOs, and they allow private firms to grow and expand their business by offering ownership of their company to the general public. Stocks can provide a return to investors in two ways: through dividend payments and through capital appreciation.
The value of a share of stock depends on the market’s appraisal of the worth of a company. Share prices typically rise when the prospects for the company’s future performance are favorable. However, the price of a stock can fall, too. The market price of a stock is the amount at which buyers and sellers agree to exchange shares in real time. It reflects the demand-supply dynamics of the market, which is determined by the number of people who want to buy or sell the shares.
Investing in stocks is a way to grow your wealth over time, or even profit from short-term stock price movements, but it does require research and diligence. Many people choose to invest in stocks as part of their overall investment portfolio, and the convenience of online brokerage and automated investing has made it possible for anyone to get started. There are several reasons to invest in stocks, including the potential for higher returns than bank certificates of deposit (CDs) or short-term savings accounts and the ability to diversify a retirement account.
The primary purpose of a stock is to give an investor an ownership stake in a company that will produce profits and growth over the long term. When a company produces consistent profits, it can pay out a portion of those profits to its shareholders as dividends. The company can also use the dividends to fund investments in growth.
Companies are often required to file financial reports with the Securities and Exchange Commission, which contain a wealth of information about the business. By reviewing these documents, it is possible to identify a company’s strengths and weaknesses.
For example, a company that regularly experiences stock outs, which occur when customer orders are not fulfilled due to lack of inventory, may need to address the problem. A company that does not properly manage its inventory can quickly find itself in a competitive disadvantage with customers who are frustrated by the delay in receiving their purchases.
A stock’s intrinsic value can be estimated by looking at various factors that contribute to its business success, such as the market share of the business, the revenue of the company, its price-to-earnings ratio, and its book value per share. Different analysts may place a greater or lesser weighting on these factors when assessing the worth of a stock.