A stock is a financial security that represents a portion of ownership — or equity — in a publicly-traded company. Shareholders have a proportional claim on the company’s net assets and future earnings, which can be converted to cash upon sale. Publicly-traded stocks are typically purchased and sold in a market called the stock exchange, or simply the “stock market.” Because of their history of high returns and long-term growth potential, they are a popular investment vehicle. However, they can expose investors to near-term risks and should be viewed as a long-term asset class.
A company issues stock in order to raise funds for a variety of reasons, including paying off debt or launching new products. A company may also decide to reinvest earnings from the sales of its stock into itself, which can lead to increased revenues and profits. Ultimately, a company’s share price reflects the value of its current and projected earnings, as well as investor sentiment about its prospects in the marketplace.
Stocks are one of the main tools that people use to build wealth and achieve financial goals like retirement and education savings. They are an important part of any diversified portfolio because of their history of historically higher returns than other major investment classes. However, stocks come with the risk that their prices can fall and may even become worthless.
The value of shares varies according to market conditions, which is why they are traded on a public market, such as the New York Stock Exchange or Nasdaq. Public companies sell their stock in order to raise money, which can be used for any purpose that the company sees fit, such as expanding operations, purchasing other companies or paying off debt. Investors purchase shares in a company because they believe that its earnings and future prospects will go up over time, and thus, their value will increase. This is called capital appreciation.
In addition to capital appreciation, investors also receive dividends when a company distributes its earnings to shareholders. In many jurisdictions, when a person sells shares in a company, they are required to pay a capital gains tax on the additional proceeds from the sale above their original cost basis.
The primary reason people buy and sell stocks is to generate a return on their investment that is greater than those of other significant investment classes, such as bonds, real estate and commodities. The stock market is a key indicator of the economic health of both individual countries and of the global economy. It is impacted by many factors, such as the success or failure of other industries, armed conflict and natural disasters. As a result, it is recommended that investors diversify their investments across sectors, regions and asset classes in order to limit the impact of market fluctuations on their portfolios.
