Stocks, particularly publicly-traded common stocks, are the cornerstone of most investment portfolios. They offer the potential to improve one’s financial situation through dividend payments and price appreciation, but they also expose shareholders to significant near-term risk, especially during periods of extreme market volatility. For these reasons, prudent investors diversify their portfolios with a wide range of stocks to minimize near-term losses and strengthen long-term returns.
A stock is a fractional ownership stake in a corporation or company. When you buy a share of a publicly-traded stock, it represents your percentage ownership in the corporation, as calculated by the total number of outstanding shares. The value of a share can be determined by multiplying the stock’s current market price by its total number of outstanding shares, or by the price-to-earnings ratio (P/E).
The primary reason most people invest in stocks is to generate a higher return than what they would receive from investing in other traditional asset classes like cash and real estate. This goal can be achieved in two ways: through dividends and through the increased value of a company’s shares when they are sold on the open market.
Companies issue stocks to raise money for various purposes, including expansion, acquisitions and paying down debt. If they choose to pay a dividend, it will be based on their available net earnings after covering all of their debts. Companies can also choose to reinvest all or part of their earnings into the business by not paying out a dividend. The stock price of a company can increase if its profits exceed expectations or if its assets appreciate in value.
Because stock prices rise and fall on a daily basis, it is important for investors to understand what drives the market. The primary driver of a stock’s price is the overall market, which is driven by the economy, interest rates and political developments. The second-leading factor is the performance of the company’s industry, measured by how the company’s stock performs relative to the rest of the industry.
Finally, the stock price is driven by supply and demand. A stock’s price will rise when there are more buyers than sellers, and vice versa. This is the same principle that causes prices for commodities to fluctuate on a minute-by-minute basis: it’s all about what other investors are willing to pay and take at any given time.
A public stock is what most people think of when they hear the word “stock.” This is the type of stock that can be bought and sold through brokerages or investment apps, and its price movements will likely be covered in the news. A company becomes a public stock when it lists its shares on major exchanges, such as the New York Stock Exchange and Nasdaq, so that everyday investors can purchase them. The company must disclose details of its finances and operations in order to be eligible to list. This process is known as an initial public offering, or IPO.