Stock is a unit of ownership in a company that, when bought and sold, gives you proportional claim to a corporation’s assets and earnings. It’s one of the core tools in most investment portfolios and is a critical element in achieving long-term financial goals like retirement savings or education costs. But stocks don’t come without risk, and it’s important to understand what you’re getting into before investing in them.
Public stocks are the kind you’re most likely familiar with — they’re the ones you can buy through brokerages and investment apps. That’s because they’re listed on major exchanges, like the New York Stock Exchange and Nasdaq, which make them accessible to everyday investors. Being publicly listed also opens companies to greater regulation, like reporting earnings and other details to the Securities and Exchange Commission (SEC).
A share of a company’s stock is a representation of your portion of ownership in the corporation that issues them. When companies sell shares, they’re inviting investors to purchase a fraction of their ownership interest in exchange for the money to help finance their business operations. The price of a share can rise or fall in value over time, depending on a number of factors, including investor demand and prospects for the company’s future performance.
When a company is performing well, it typically makes more profits than its assets are worth, which tends to increase the value of its shares over longer periods of time. Over shorter periods of time, however, the price of a share can fluctuate based on a wide range of factors that may not have anything to do with a particular company’s performance.
The price of a share is determined by supply and demand in the market. In other words, if there are more shares available in circulation than the amount of demand for them, then the price will drop. Conversely, if there is more demand for a certain stock than the number of shares that are currently available, then the price will climb as buyers try to outbid each other for a chance to own the company’s stock.
When you own a stock, you can choose to sell it at any point or let it grow over the long term. The latter approach is more common, because it allows you to diversify your investments across a variety of sectors and avoid being too dependent on any one industry or sector that might struggle in the short term. But even with a solid long-term plan, you should be prepared for fluctuations in your portfolio. Economic events, environmental disasters and political crises can have a big impact on what happens to individual stocks. That’s why many experts recommend that you diversify the stock markets and companies in which you invest to mitigate the risks of an unexpected shock.
