Stocks (also known as shares or equities) are one of the core investment vehicles in most investors’ portfolios. They represent a piece of ownership in a company, and the hope is that their value will go up over time so you can sell them at a profit. However, it’s important to know that stocks come with risk—and that’s why it’s important to build a diversified portfolio of individual stocks and mutual funds.
There are many different types of stocks, but they all have the same basic structure: A share is a fractional part of ownership in a company. Each share represents a claim on the company’s assets and earnings. Companies sell their stock to raise money and invest in new projects or growth initiatives. If the company does well and grows in value, it will likely pay out dividends to its shareholders. The company will also use some of its proceeds to pay off debt, which may help improve its financial health.
Historically, stocks have offered great returns for investors. But it’s not a sure thing, and you need to diversify your investments across different sectors, regions and even countries, to protect yourself against major fluctuations. A diversified portfolio also diversifies your exposure to different risks, so if one type of stock has a bad year, the others might make up for it.
A stock can be a physical object—a piece of land, for instance—or an intangible item such as shares of a corporation. The latter are bought and sold on a marketplace called the “stock market,” which operates like a voting machine in that its prices rise and fall depending on what other buyers and sellers are willing to pay for it at a given moment.
When a new company goes public, it will work with investment bankers to set a price for its initial public offering. The resulting shares are then traded on the secondary markets, which include the New York Stock Exchange and Nasdaq. This market is volatile, with institutions and brokerages on both sides constantly bidding and asking for new prices.
Owning a share of a company’s stock doesn’t give you much weight in the company or get you rubbing elbows with company bigwigs. What it does do is give you a share of the company’s profits, and the hope is that those will grow over time so you can sell your stock at a profit.
Likewise, the term stock can also be used to refer to a cooking liquid made by simmering animal bones, meat or fish with vegetables and aromatics such as onions, carrots, celery, and parsley, often for an extended period of time. The flavor of the stock comes from the bone marrow and other connective tissue, which are transformed into gelatin when cooked. Some cooks add a bouquet garni, a bag of herbs including parsley, bay leaves, and thyme that is added to the pot to infuse the stock with more flavor.