Stock, also called equities, are an ownership position in a public company. Each share of a stock represents a fractional ownership position in the company that issued the shares. Buying stocks allows investors to gain access to the market’s capitalization, and provides companies a way to raise money to grow their businesses.
Stocks offer voting rights and the potential for dividend payments. Investors can also benefit from price appreciation, when the stock’s price rises after purchase. These gains can offset a portion of the cost associated with purchasing the stock in the first place, though careful investors often diversify their portfolios to minimize exposure to volatile market movements.
The average annual stock market return over the last century has been about 10%, though this figure masks significant losses that can occur in any given year. This volatility can be attributed to a variety of factors, from overall market conditions to more specific events, like a communications crisis or product recall. When a stock is sold at a loss, it loses value and can no longer be used to generate investment returns.
A stock’s trading price is the amount at which an arm’s length buyer and seller can agree on, assuming both parties are well-informed and acting in their own best interests. In general, the value of a stock is closer to its actual trading price than its actual market value, which can be affected by things like market fluctuations and investor sentiment.
Most equity investors own publicly traded common stocks, which offer voting rights and the possibility of dividends. However, there are also privately held or “private” stocks, which are typically limited to a small group of wealthy and/or highly accredited investors. Private markets are less regulated and can be quite volatile, which is why the Securities and Exchange Commission imposes strict requirements on private investor participation.
When a company issues its first stock, it is usually referred to as an initial public offering (IPO). These types of offerings tend to generate a lot of media attention, particularly when they occur at large and well-known companies. However, the vast majority of stocks that are traded on public markets are not issued through IPOs.
Companies are usually required to file financial documents with the SEC on a quarterly basis, including a profit and loss statement, balance sheet, and more. Investors can use these reports to evaluate the company and its performance, as well as gauge any potential opportunities or threats.
Aside from quantitative metrics, investors should also consider qualitative aspects of a business when evaluating a stock’s worth. For example, a company with a defensible economic moat may be better able to compete with new market participants, while brands with strong user bases can leverage network effects to increase profitability. In addition, companies with intangible assets, such as patents or regulatory approvals, can also hold considerable value. Investors who can effectively identify and assess these qualities will be able to make informed and confident investments.
