A share of stock represents a tiny slice of ownership in a company. The company’s success — or its failure to generate returns on invested capital and make money selling its products or services — can be reflected in the price of its shares. Most stocks are publicly traded, which makes them a more liquid investment than some other options like real estate.
A company issues stock so that it can raise capital to fund its operations. Investors buy the stock, hoping that the business will prosper in the future and that they can sell their shares at a profit. The company also pays dividends to shareholders on the money it has earned from its operations.
There are different types of stock, and the type a shareholder holds determines his or her rights and benefits. For example, common stock usually offers voting rights, while preferred stock typically does not. Most investors hold both kinds of stocks, but some prefer one over the other.
Stock prices fluctuate on a daily basis, and that can be unnerving to new investors. The reason is that a stock’s price reflects both the business success or failure of a particular company, and the overall performance of the market, including other stocks in the same sector.
If a business does well, it’s likely that its sales and profits will rise, and the price of its shares will go up. On the other hand, a shrinking company will see its share price fall.
The main objective for most investors is to achieve a long-term return on their investments that exceeds that of other prominent assets, such as real estate and bonds. The goal is usually to generate wealth for retirement or other goals.
Investing in stocks can be done individually, through brokerage accounts or mutual funds. Mutual funds offer a way to diversify your portfolio and minimize the work involved in researching individual companies.
While it is possible to lose money investing in stocks, many people have made significant wealth from a stock portfolio. The key is to avoid watching day-to-day stock prices and instead focus on the long-term goal of building wealth. It may help to establish a calendar and predetermine when you will reevaluate your portfolio, to keep the emotion out of the decision making process. You can also use a strategy such as dollar-cost averaging to reduce the impact of buying on a high or low day in the markets. A good rule of thumb is never invest any money that you can’t afford to lose, or that you might need in the near term. That might sound like a simplistic rule, but it is an important one to follow.