Stock is a financial security that represents an ownership interest in a company, giving the holder a proportional claim on the company’s assets and future earnings. Publicly-traded stocks are a staple of every investor’s portfolio, but they can expose investors to near-term risks that can cause prices to drop. For this reason, prudent investors seek to diversify their holdings and avoid investing in companies that are undergoing major turmoil.
There are many ways to evaluate a company, but the fundamentals are key: revenue growth, earnings patterns and a strong business model. It is also important to understand how your individual stock fits into a larger market trend – are we in a bull or bear market? A good way to gauge whether a stock is over or undervalued is by comparing it against the performance of a benchmark.
A stock’s price is determined by supply and demand, largely driven by investor expectations about the company’s future performance. If investors are confident that a company will rapidly grow and produce large returns on investment, their demand for the stock will drive its price up. The opposite is true if investors are pessimistic about a company’s prospects, which will lower the stock’s price.
In addition, investors often evaluate a company’s qualitative strengths and weaknesses when determining its value. For example, a company with a defensible economic moat is better able to compete with new market entrants, while companies with extensive user bases benefit from network effects that reduce the cost of switching.
There are two main categories of stock: common and preferred. Common stocks offer owners proportional ownership of the company, voting rights and a claim on the company’s assets and earnings. Preferred shares typically provide a priority over other classes of stock in receiving profits and liquidation proceeds.
It’s possible to buy or sell shares directly through a stock exchange, or indirectly through a broker. A broker can offer you a variety of tools to help you make informed trading decisions, including real-time quotes and charts. In some cases, brokers may even offer you commission-free ETFs, which can help you build a low-cost portfolio.
A stock’s price fluctuates throughout the day as traders react to news and events in the market. However, long-term, patient investors can reap the rewards of owning quality stocks in strong businesses. In the worst-case scenario, a company’s stock can plummet to zero and investors can lose all or part of their money. To minimize this risk, prudent investors diversify their holdings and stay abreast of the latest market trends and developments. By following news, researching a company’s financial history and learning more about its business model, you can make the best investing choices for your unique goals and values.
