Diversifying Your Stocks

A stock is a share in the ownership of a corporation or company, and it gives you the right to vote at shareholder meetings and receive dividends. The value of a company’s stock can rise when other investors buy shares, and can fall when others sell their shares. Because of this, it’s important to diversify your investments by buying stocks in many different companies and industries.

A company issues stock in order to raise money, either to pay off debt or to launch new products. Investors purchase those shares on a public market, and the stock’s price can increase or decrease as investors buy or sell their shares. It’s also possible that a company may go bankrupt, and in that case, the owner of its stock will lose their investment.

Most people invest in stocks for the long term, with the hope that they will grow over time and outpace inflation. The key to achieving this goal is to buy low and sell high, but predicting when a company will have success or fail can be very difficult.

Because of this, many investors choose to build diversified portfolios by investing in many different companies and industries. A well-diversified portfolio can help reduce the risk of a particular sector’s performance going down, and it can also make it easier to weather economic downturns.

Depending on the type of stock you buy, you might have voting rights as a shareholder or simply a claim on its assets and earnings. Common stock holders typically have voting rights at shareholder meetings, and can choose the company’s board of directors. Owners of preferred stock don’t have voting rights, but usually have a higher claim on a company’s assets and earnings than common stockholders do. They are also paid dividends before common stockholders.

The stock market is a complex ecosystem, with buyers and sellers on each side constantly bidding and asking for new prices. On a second-by-second basis, the price of a stock is determined by supply and demand—the lower the amount of available shares in circulation, the more they will cost to buy, and vice versa. Other factors, like psychology and market conditions, also play a role in how a stock price fluctuates.