Stocks are part ownership in a public company and an opportunity to partake in its successes (or failures) over time. Many investors use stocks as one of their core tools to grow their savings and plan for long-term financial goals like retirement or education. But buying and selling stocks is not without risk, and the price of a share can fluctuate dramatically.
In the simplest terms, stocks are a way for a company to raise money and expand its business. Companies will issue a stock when they need funds to buy equipment or grow its business, and when the company grows and succeeds, its shares are expected to rise in value over the longer term. As the value of a stock rises, it can then be sold for a profit. When a stock sells for a lower price than it was purchased for, it is said to be trading at a discount.
A company can choose to issue stocks in a variety of ways: through a share offering, by issuing debt or by issuing warrants. When a company issues a share offering, it will set a price per share and distribute these shares to investors. Investors can purchase these shares through a brokerage or an online trading system.
The prices of stocks are determined by supply and demand in the market, as well as by other factors, such as the economy, political events and news, and investor expectations. Some companies have a competitive advantage that can lead to higher stock prices, such as a strong brand name or unique technology. Companies with monopolies or dominant market positions can also see higher share prices.
Some investors try to determine the fair price of a stock by looking at its earnings per share and book value per share in relation to those of its peers. Legendary investor Benjamin Graham devised a formula that uses these numbers to calculate the intrinsic value of a stock.
Other investors look at a stock’s liquidity, or how easily the shares can be bought and sold in the market. This can be influenced by a number of factors, including the amount of debt that a company has and its historical stock performance compared to the overall market or sector.
Ultimately, the price of a stock is determined by the individual investor, but some helpful tools are available to help them make better decisions. The most important step is to learn as much as possible about a company before making a purchase. This includes reviewing all records and account statements, checking the company’s website and examining reports issued by the financial media. Investors should also be aware of their investing goals and the guidelines in their investment policy statement, if they have one. By using these resources, and by taking the time to evaluate each investment, investors can be confident that they are purchasing a stock at its fair price. This will ultimately give them the best returns on their investments.
