How Do Stocks Work?

Stock, company shares, equities: Whatever you call them, these investments are one of the core tools people use to grow their savings and plan for financial goals like retirement. Stocks are complex, and their prices rise and fall based on many factors. But understanding how stocks work can help you decide if they’re right for your portfolio.

Companies sell shares of their company to the public to raise money and give investors a stake in the business. They can also use the money to grow their businesses or pay off debt. Investors buy and sell the company’s shares to make money, and the value of the share fluctuates based on supply and demand.

When companies go public, they are listed on a stock exchange (like the New York Stock Exchange or Nasdaq) and their shares can be bought and sold among investors. Companies start by selling their stock through an initial public offering, or IPO, in which they disclose how much their stock is worth and set a price for it. When they’re publicly traded, their shares can be bought and sold throughout the day by people like you and me who have brokerage accounts.

In addition to the P/E ratio, there are many other ways to evaluate a stock. These include the quality of a company’s earnings, its cash flow, its asset turnover, and its growth prospects. A reputable investment group will take all these factors into consideration when helping you select which stocks to buy and sell.

The stock market is a fascinating place to watch the laws of supply and demand at work in real time. Each trade transaction must involve a buyer and seller, and the price of a stock will change based on how many buyers are willing to buy it and how many sellers are willing to sell it.

If there are more buyers than sellers, the stock will trend up, and if there are more sellers than buyers, the stock will trend down. The stock market relies on professional traders to maintain a continuous bid and offer for each stock so that motivated buyers and sellers can find each other at any moment. These professionals are called market makers.

While buying and selling stocks can be a great way to diversify an investment portfolio, it’s important to remember that no investment is without risk. If a company experiences serious problems, its shares could plummet in value. To mitigate risks, many people purchase stocks in companies of varying sizes and industries to spread their risk around.

Investing in the stock market takes time and forethought. Choosing the right stocks for your portfolio requires research, knowledge of the various types of stocks and how they behave, and a clear understanding of your own personal investing goals. The team at Spinnaker Finance can help you determine which stocks are right for your portfolio, and recommend strategies to maximize your returns. Contact us today to get started.