Stock represents ownership of portions of a company’s future earnings potential. A share of stock can be viewed in a legal sense as a portion of the net realizable value of the company’s assets that would be left after all debts are covered and all liabilities are satisfied. The market’s projections of how a business will perform influence daily stock trading prices.
Stocks are a way for companies to raise money to grow their businesses. The companies issue shares to investors, who buy them in the hopes that the stock price will rise over time and they will be able to sell their shares for more than they paid for them. In the long term, a business growing its sales and profits will probably see its stock price increase. But the performance of stocks is also influenced by things outside of a company, such as government policies, interest rates, economic conditions and market sentiments.
Some companies will only offer their stock to investors in an initial public offering (IPO), which happens when a private firm decides to go public with its shares. The IPO will have a primary market price, which is determined by investment bankers and based on demand from institutional investors. Then the stock will start trading on secondary markets, including the New York Stock Exchange and Nasdaq. A company may also conduct a stock split to make more shares available for investors.
As a shareholder in a public company, you can buy or sell your stock on the open market at any time. But you should always keep in mind that the price of a stock can drop or even go out of business, and that can leave you with less money than you started with. You can protect yourself from this risk by keeping track of your account statements and following company news and market and economic news.
A stock’s intrinsic value is its worth in and of itself. It is this worth that helps determine whether a stock is a good buy or a bad sale. Some ways of figuring out intrinsic value include looking at valuation ratios, which compare a stock’s price to the per-share earnings or other comparable metrics.
You can also look at a stock’s financial performance and how it stacks up to competitors in the same industry. For example, if you are considering buying a television, you might compare the features and cost of several different models to find the best value.
A good place to invest your money is in a well-diversified portfolio, which includes stocks from many different companies and industries. Some people choose to do this through their employer’s retirement plan, such as a 401(k). Some people use financial vehicles, called derivatives, to control large blocks of stocks for much smaller amounts of cash than they would need to purchase them outright. This is known as margin trading. Margin requirements have been regulated since the Crash of 1929 to protect investors from losing more than they can afford to lose.
