A stock is a share of ownership in a company, and many people invest in stocks because they expect them to rise in value. When a company has good financial performance and grows, its stock price increases. When a stock is undervalued, investors can buy it for less than what they paid for it, and potentially make a profit.
Public companies issue stock to raise money and grow their businesses. Investors purchase shares of those companies, and they earn profits when the share price rises, receive dividends if the company distributes them, and may have voting rights at shareholder meetings.
Stock prices rise and fall due to various factors, including market fluctuations, investor speculation activity and reaction to news and events. This volatility is one of the primary risks of investing in stocks, but it typically evens out over time.
When deciding whether to hold or sell a stock, an investor should consider the fundamentals of the company, including its growth potential and competitive advantages, and the economic outlook in general. A stock’s relative valuation should also be considered, using metrics such as the price-to-earnings ratio or a discounted cash flow approach.
Most publicly traded companies sell their stock on a stock exchange, such as the New York Stock Exchange or Nasdaq. This allows shareholders to trade their shares directly, though many investors use a broker or other intermediary who has access to the stock exchanges to purchase and sell on their behalf.
When purchasing a stock, you’ll be presented with a price quote, which includes a bid and an offer price. The bid is the highest price that someone in the market is willing to buy your shares, and the offer is the lowest price they’re willing to accept for them. The difference between the bid and offer is known as the spread.
As an investor, you’ll also want to choose the right order type for each transaction. Unless you’re day trading, which is very risky and should only be done with very small amounts of capital, you should stick with basic orders such as market or limit orders. Limit orders allow you to name your desired buy or sell price, and your trade will only be executed if the stock hits that price within a certain time frame.
Investors who use dollar-cost averaging can mitigate the impact of volatile stock prices by making regular purchases over a long period of time. For example, if you’re trying to get in on a new tech stock and its price drops sharply, by investing the same dollar amount each week, you can end up paying an average of the stock’s current price over time. This helps you avoid buying at a peak and selling at a low point, which would leave you with paper losses. Of course, the same principle applies to any asset class, such as real estate or commodities.
