A stock is a financial security that represents ownership equity — a proportional claim on the company’s net assets and future earnings. Buying a share of stock gives you the right to receive dividends (a portion of a company’s earnings paid out to shareholders) and to sell your shares at any time, depending on market conditions. Because stocks have a history of providing high returns, many people invest in them to achieve long-term financial goals. However, because of the high levels of near-term risk associated with most publicly traded stocks, they should be considered only as a part of a diversified portfolio.
A company issues stocks to raise money for a variety of reasons. For example, a company may need to expand operations, buy new equipment, or pay down debt. During the initial public offering (IPO) process, the company and its advisors disclose how many shares will be offered and set an IPO price. The shares are then sold on the secondary markets, known as the “stock market,” where the price of a share fluctuates based on a number of factors.
Investors buy and sell stocks through a number of exchanges, like the New York Stock Exchange or Nasdaq. They can also purchase individual stocks through brokerage firms, banks, and other institutions. The goal of investing is to generate a long-term return on investment that exceeds that of other important asset classes, such as cash and bonds. This can be achieved through price appreciation and dividend payments.
Stocks are a key component of most investors’ portfolios. The main reason is that they have historically generated high returns over the long-term compared to other assets, such as real estate and bonds. In addition, a growing economy typically boosts company revenues and profits, which increases the value of a stock.
The primary way to make money from a stock is by selling it at a higher price than you bought it for. This is called “buying low, selling high.” The other major source of income from stocks is through dividends, which are a periodic payout of a company’s earnings.
A stock can be classified in a variety of ways, such as by its market capitalization or industry sector. Market cap refers to the total value of a company’s outstanding shares multiplied by the current market price per share. Industry sector classification is a more detailed way to describe the company’s business, including its competitors.
The best way to think about a stock’s performance is to compare it to other companies in the same industry. This allows you to gauge its competitiveness, which is often a strong indicator of future earnings potential. Another key factor to consider is a stock’s historic rate of return, which accounts for the percentage increase in share price plus any dividend or interest payments over a specific period. Keeping these points in mind can help you decide whether or not to add it to your portfolio.
