The stock market is a trading platform where investors can buy and sell shares of publicly-traded companies. Also known as equities, stocks are one of the key components in most portfolios because they provide higher returns than many other investment products over long periods of time. As such, they can be an important element in achieving financial goals like retirement.
A share of stock represents a fractional ownership stake in a company, similar to the way you might own a home or car if you own property in a real estate development. Publicly-traded companies issue stock to raise funds for growth or expansion and in exchange, they give shareholders a claim on the company’s assets and earnings. Companies can use the money they receive from stock to pay off debt, fund growth plans they can’t or don’t want to finance with new loans, and distribute dividends to shareholders.
Investors use the stock market to diversify their portfolios by purchasing individual stocks or mutual or exchange-traded funds that own multiple stocks in a pooled portfolio. Investors can also invest in broad sectors of the market, such as U.S. equities and international equities, to gain exposure to the global economy without having to own every single stock in the market.
For investors, the primary reason to buy stocks is that they provide a return on their initial investment. Stock prices move up and down in the market as a result of a variety of factors. Some of these include economic trends, changes in demand, and news events that affect a company’s reputation or outlook. In addition, stocks are often evaluated by comparing their performance against an appropriate benchmark, such as the S&P 500 or other market or sector indexes.
Other factors that impact a stock’s value include the price-to-earnings (P/E) ratio, which measures how much the stock is being offered for relative to a company’s current earnings per share; the price-to-book (P/B) ratio, which evaluates a company’s stock value based on its net assets; and the yield, or annual return on a security, which reflects its annual income from interest and dividend payments divided by its total asset value.
There are several ways to buy and sell stock, including via a broker, a mutual or ETF, or directly through your bank or credit union. The price of a stock is determined by supply and demand, so if there are more people willing to buy a certain stock than there are sellers, its price will rise. In the same way, if there are more people selling a particular stock than buyers, its price will fall. For this reason, it’s important to understand the laws of supply and demand before investing in the stock market.
