Stocks are an essential part of most investment portfolios. They have a history of high returns, but they also come with significant short-term volatility. This is why it’s important to diversify your stock investments. This helps you balance your economic exposure and minimizes risk in the face of near-term market shocks.
When you buy a share of stock, you’re purchasing a fractional ownership stake in a company. The hope is that the company will grow, and the value of your shares will go up. You can then sell your shares for a profit.
The price of a share of stock changes constantly, as investors and brokers bid for and offer them on the secondary market. This market, referred to as the “stock exchange,” operates on the principle of supply and demand. If a large number of buyers are interested in a particular company’s stock, the price will rise because the demand is so strong. Conversely, if there are more sellers than buyers, the stock’s price will fall.
There are many different ways to evaluate stocks, and the underlying principles are often quite similar. Whether you’re using quantitative metrics like PE ratios or more qualitative measures like the strength of the company’s business model, you’re trying to determine a stock’s intrinsic value. If the market price is below that value, the stock may be a good buy; if above it, a good sale.
In addition to a company’s overall performance, a stock’s price will fluctuate based on the economic climate and news about the industry or specific companies. This is why it’s important to stay up-to-date with general economic news and to read the business sections of your local newspapers. You’ll want to understand if interest rates are increasing, if inflation is rising, or if the currency in which your stocks are traded is strengthening or weakening.
Stocks can also be grouped into categories based on their size and industry. These classification systems can vary, but most include categories like technology, health care, and energy. Each sector will tend to react differently in times of economic stress, and this can help you diversify your investments so that they are less sensitive to market fluctuations.
