A stock is the fractional ownership of a company in which each share represents a claim to net assets and future profits. People buy stocks for a variety of reasons: to make money when the price goes up, or to receive dividend payments, which are a portion of the company’s profits that get distributed to shareholders; and also to have voting rights on issues important to the company. Most stocks have a tendency to increase in value over time, although historically this has not always been the case and investors should be prepared for periods of price volatility.
The most common way to invest in a stock is through the public market. This is where shares are sold by companies to raise funds and give new investors ownership stakes in the company. This process, known as an initial public offering (IPO), is regulated by government agencies such as the Securities and Exchange Commission and the Commodity Futures Trading Commission. Private companies that want to raise funds may also issue stocks in the private market, but this involves less regulation and is usually only available to wealthy or highly accredited investors.
In addition to considering the fundamentals of a stock, savvy investors consider its intrinsic value. This is the price that a stock should be worth, regardless of what other people think. In the financial world, this is often compared to the book value of tangible assets like equipment and buildings, which can be easily measured and recorded. However, it can be difficult to assess the value of intangible assets such as intellectual property and brand recognition.
Ultimately, the value of a stock is determined by supply and demand. If there are more prospective buyers than sellers at any given moment, the stock will rise in price. Eventually, as prospective buyers enter the market and sellers leave, the price will stabilize at an equilibrium point. The product of this instantaneous price and the float is the company’s market capitalization at that moment.
Investors also consider a stock’s growth and profitability. For example, if a company’s revenue and earnings are increasing rapidly, this will likely drive its stock price up. Conversely, if the company’s revenues are flat or declining and its earnings are not growing, this will likely cause its stock price to decline.
Investors can also use tools such as price-to-earnings ratios and profit margins to evaluate a stock’s performance and potential for future returns. These are typically used in conjunction with other metrics, such as qualitative analysis of a company’s strengths and weaknesses and network effects. For instance, if a company has a defensible economic moat, this can protect it from competitors and limit the number of users it must attract to be profitable, while companies with high switching costs benefit from strong network effects that may help them retain customers. This type of evaluation is generally considered to be an essential part of the fundamentals of a stock.
