Most people know that stocks are a way to buy ownership stakes in businesses, but they may not be sure exactly what shares represent or how the market works. Stock, also known as equity, is the smallest unit of ownership in a company. When you purchase shares of a publicly traded business, you become part owner of that business and share in its profits and losses. As a shareholder, you can earn dividends from the company’s earnings or sell your shares for more money than you paid to purchase them.
Stock can be used to build a diversified portfolio that includes the types of companies you like. You can also purchase shares in mutual funds, which are baskets of hundreds of individual stocks within a single fund that eliminates the need to research and analyze each stock individually. A well-diversified portfolio can provide growth and income over the long term, even though a company’s stock price may fluctuate up or down on a daily basis.
Some investors choose to trade individual stocks, which can be a good way to dip your toes into the market. However, building a portfolio from individual stocks can be time consuming and expensive. When you purchase a stock, you must consider the fundamentals of the company and its financial position to determine whether the price is reasonable. Purchasing shares on a hunch or on the basis of market hype can lead to poor performance.
If a company’s stock price is too high, it can be a bad investment because you will lose money when you sell your shares. This is why it is important to keep your investing goals in mind and stick to a plan, such as dollar-cost averaging, when you begin purchasing stocks.
There are different types of stock, including common and preferred shares. Each type has its own unique rights and benefits, but they all allow you to share in a company’s profitability. For example, some classes of stock may offer special voting rights or priority in the distribution of profits and liquidation proceeds.
Public stock is what most people think of when they hear the word “stock.” When a private company goes public, its shares are listed on an exchange, such as the New York Stock Exchange or Nasdaq. This makes them accessible to everyday investors and opens the company up to increased regulation. A company will typically list its stock when it wants to raise money for expansion or to grow its profits. When a company lists its stock, it must disclose certain aspects of its business to the Securities and Exchange Commission (SEC). This information is then disseminated to potential shareholders. The share prices on an exchange reflect investor demand for the stock. If demand is strong, the stock’s price will increase, and vice versa.
