Stocks represent a fractional ownership stake in a company and give you the right to partake in its successes (and failures) over time. A stock’s value fluctuates depending on many factors, including the company’s performance and the economy as a whole. Choosing the right stocks requires careful research and well-established methods of evaluation. Investors make money in stocks by purchasing them at below-market prices and then selling them later for more than they paid, or through dividends, which are regular payments to shareholders. In addition, stocks can be a good way to diversify your holdings.
Companies issue stock to raise cash, pay off debt, or finance growth plans that they can’t or don’t want to fund with new loans. A company’s value can increase through share appreciation – when the company does well financially or becomes more desirable, its shares will increase in price, making it possible for investors to sell their shares at higher prices than they purchased them. Value can also be determined qualitatively, with assets such as a defensible economic moat, large user bases, and brand recognition carrying considerable value.
A stock’s price is a reflection of demand, which in turn can be influenced by macroeconomic factors such as the phase of the economic cycle and forecasts for GDP growth and inflation, as well as geopolitical developments. These factors can affect the overall risk appetite of investors and directly impact valuations by reducing investor confidence, driving interest rates, changing currency exchange rates, or affecting foreign-direct investment (FDI).
When selecting individual stocks, it’s important to understand how they perform relative to their industry as well as the broader market. Many traders compartmentalize the market into broad sectors like technology, energy, and financials, or break down sectors even further into specific industries, such as software, semiconductors, and computer hardware within the tech sector. It is also common to see investors compare the performance of individual stocks with their peers, using metrics such as valuation ratios to determine whether a stock is over- or undervalued.
Investors buy stocks for a variety of reasons, but the most common is to gain long-term returns that outpace inflation. However, it’s important to remember that all investments come with risks, and you should always evaluate your portfolio against an appropriate benchmark based on your own investing goals and risk tolerance.
Stock market participants include individual retail investors, mutual funds and exchange-traded funds, pension funds and insurance companies, asset management firms, and private investment banks. Robo-advisors that automate investment for individuals are also major market players.
Most Americans own stocks through their employer-sponsored retirement accounts, such as 401(k)s, which hold a number of company stocks pooled together. In addition, many people own stocks through online brokerages and investment apps that allow them to purchase and sell individual company shares. NerdWallet’s stock rating system rates online brokers and robo-advisors on over 15 factors, including account fees and minimums, investment choices, customer support, and mobile app features.
