A stock is a share of ownership in a company that gives you the right to partake in the company’s profits and losses over time. Buying a stock is a significant investment, so it’s important to decide whether you have the risk tolerance and financial goals necessary for this type of investment. There are also a variety of tools available to help evaluate stocks, including fundamental and technical analysis, and investor reports put together by professional analysts.
The price of a stock is determined on a second-by-second basis by supply and demand. Buyers and sellers are constantly bidding and asking for new prices, with institutions trying to build huge positions on the one hand and brokerage firms working for individual investors on the other. If there are more buyers than sellers, the price will go up as they raise their bids and sellers lower their offers.
In addition to the market-driven price, a stock’s intrinsic value is not necessarily tied to its current price, although some would have you believe otherwise. A number of factors influence the intrinsic value of a stock, including its past performance, the strength of its competition, and the overall economy and market trends. A stock’s price may also be affected by rumors or potential bad news about the company, even if nothing has actually changed.
Companies can issue different types of shares, each with unique ownership rules and privileges. Common stock entitles its owners to vote on major issues at annual meetings and gives shareholders a claim on a company’s assets and earnings. Preferred stock usually doesn’t give voting rights, but it does entitle its holders to receive dividends before common stockholders get theirs.
Whether you choose to invest in common or preferred stock, there is always a chance of losing money. But with careful planning, you can make sound investments that increase your wealth over the long term. You can also diversify your portfolio by holding stocks in a wide variety of industries and by using exchange-traded funds or mutual funds to expand your investing opportunities.
While the allure of home runs like the FAANG quintet (Facebook, Apple, Amazon, and Google parent Alphabet) is appealing, it’s important to remember that most stocks are not home runs and that a well-diversified portfolio is more likely to yield long-term returns. Choosing a stock requires research and thoughtful evaluation, with consideration to both the company’s business model and the industry in which it operates.
You can find information about individual stocks by searching online or consulting professional analysts, who often publish detailed reports on the markets they cover. A broker or investment firm can also provide advice and guidance. Some experts suggest that you determine your risk tolerance and financial goals before investing in stocks, and stick to a well-diversified portfolio to minimize the risks associated with a single stock or industry. You should also consider whether you want to receive dividends and factor in inflation as part of your assessment.
