A stock is a share of ownership in a company. People buy and sell stocks based on their expectations about future performance and dividends. The price of a stock fluctuates based on sales, growth, and profitability—and sometimes other factors like the health of the economy and interest rate conditions.
Investors own shares of stock in companies that have been listed for sale on a public stock market, like the New York Stock Exchange or Nasdaq. They buy and sell them to try to profit from changes in the value of their investment, as well as to diversify their portfolios.
Companies issue stocks to raise money and give shareholders a stake in their success. They may use the money to pay debt, launch new products or expand their operations, according to the Securities and Exchange Commission. Stocks also provide opportunities to gain wealth by growing their value, especially if they outpace inflation over the long term.
Individual investors can invest in a specific company by purchasing its stock, but most buy and sell stocks through mutual funds or index funds that pool a diverse array of investments together. This allows them to make small investments in many different stocks without tackling the task of researching and purchasing individual stocks on their own.
If a company’s stock rises in value, shareholders can turn that money into cash by selling their shares at the current market price. This is known as making a capital gain, and the profits can be taxed in different ways than ordinary income.
A company’s stock can be classified as common or preferred. Generally, common stock comes with voting rights, which allow shareholders to vote for management changes or other structural business changes at annual shareholder meetings. Preferred stocks don’t have voting rights, but they are given a priority when earnings are distributed. This means if a company is going under and needs to liquidate its assets to pay back investors, preferred shareholders are less likely to lose everything.
When a stock price falls, investors may lose money, although it isn’t unusual for a stock to see big fluctuations over short periods of time. Most investors consider stocks to be long-term investments, and those that stick with them over decades have generally been rewarded.
While a stock’s price is determined by the market, it can also be affected by the reputation of the company, news events or political turmoil. As a result, it’s important to research each company you are considering investing in.