A stock is a share of ownership in a public company. When you buy a share of stock, you own a proportional claim to the company’s net assets and future earnings. Publicly traded stocks have historically provided higher returns than other asset classes, but they also expose investors to near-term volatility. A well-diversified portfolio that includes stocks, bonds and real estate can help manage this risk.
There are two types of stock: common and preferred. Most people invest in common stock, which gives them a proportional ownership stake in the company, along with voting rights and the right to dividend payments. When companies go public, they typically issue a certain number of shares of stock on an exchange to raise funds and grow their businesses. Stockholders can then trade those shares with other shareholders, allowing them to participate in the company’s growth and profit potential.
When it comes to investing, stock prices generally follow the laws of supply and demand. When a company has a strong prospect for success, investor demand usually increases, which drives up the price of the shares. On the other hand, if many investors turn sour on a company and want to sell their shares, the price of those shares will decline.
In addition to a company’s financial history, evaluating its business model and industry can help determine whether it is a good investment. For example, a company with a defensible economic moat may be able to hold off competitors and increase profits, while companies with large user bases can benefit from network effects.
Other important stock evaluation metrics include a company’s profitability, which can be gauged by looking at its current and projected earnings per share. A high earnings-per-share ratio means the company is producing lots of revenue and profits, which can result in increased stock prices.
Stocks can be further classified based on their market capitalization, with larger companies often broken down into large-cap and mid-cap categories. Very small companies are sometimes grouped into microcap stocks. Additionally, stocks can be divided by sector, with different industries such as technology, health care and energy tending to behave in predictable ways during economic cycles.
Using the above stock metrics, along with a comprehensive financial plan, can help you make sound investments that can potentially give you fantastic returns over time. Remember, though, that nothing is guaranteed in the market. Stick with your long-term investment goals, and stay invested, even when the market is volatile, and you could reap rewards in the years to come.