Investing in stocks can be a great way to grow your wealth over time and outpace inflation, but it’s not without risk. Stock prices fluctuate for many reasons, from market trends to company-specific news. The key is to understand how each factor impacts a stock’s value and how to evaluate whether it’s a good choice for your portfolio.
Stocks are the shares of ownership in a public company. Companies raise money for their business by issuing shares in an initial public offering (IPO). Investors then trade those stocks on a stock market exchange, which is known as the secondary markets. Stocks may make you money in a number of ways: They can appreciate in price, and they may pay dividends. Companies that pay dividends typically distribute them quarterly or annually from their net income.
The value of a stock is based on several factors, including how successful the company is at making a profit, its customer base, its financial structure, and economic, political, and cultural trends. However, the majority of stocks’ overall returns come from increasing share prices or dividend payments. A stock’s share price increases when investors are confident the company will be able to continue to meet expectations or grow its business.
Investors also look at a stock’s value compared to its price-to-earnings ratio, which compares the company’s current market price to its per-share earnings. If a stock is trading for less than the company’s per-share earnings, that’s considered a bargain.
A stock’s performance is also influenced by its overall industry and the economy, as well as the political and social climate in which it operates. For example, a company that has been having trouble finding buyers might find its shares drop in value.
Stocks are a popular investment for many people because of their long-term potential to increase in value over time, even after factoring in inflation. But every investor has different goals and expectations for their return, so it’s important to consider how much risk you’re willing to take with each individual stock.
Once you’ve decided to buy a stock, you’ll need to choose a broker and determine how many shares of the stock you want to purchase. Start small and conservatively – don’t go all in right away, especially if you’re not used to managing large amounts of money. A good rule of thumb is to have a portion of your portfolio dedicated to stocks that represent different industries and sectors, with one or more holdings in each major stock market.
When you’re ready to buy, simply enter the stock ticker symbol into your broker’s system and specify how many shares you’d like to purchase. A computer owned by your broker will then buy the stock for you and record it in your account. Some brokers will allow you to do this by phone or through a mobile app. Alternatively, you can use an online brokerage service, which can simplify the process even further.