Stocks, also known as equities or shares, give investors the opportunity to participate in the success of publicly traded companies. They are one of the primary tools used to grow personal savings and help reach financial goals like retirement or education. The price of a share will rise or fall, depending on the success of the company and the overall economy. While buying stocks is not without risk, it is also one of the best ways to diversify an investment portfolio and mitigate against losses.
Stock is an ownership stake in a company, and a portion of the profits the company makes, if successful, are distributed to shareholders. Investors in stocks can make money in two ways: through increases in the company’s share price and through dividend payments. Companies are able to increase their share price through the growth of their business or by selling shares to raise capital for expansion. A company that is growing faster than the average for its industry or that is achieving better sales results than expected will see its share price rise.
Valuing a stock before purchasing is essential to making sound investment decisions. In some cases, investors might be able to identify that a stock is undervalued by using valuation ratios such as price-to-book or price-to-earnings. However, many of these ratios are not universal and must be adjusted for the type of company and industry. For example, a bank will be valued primarily on the amount of assets it has accumulated and how well those are managed, while retailers are more concerned about how quickly they can sell products to customers.
The overall market or macroeconomic conditions can also affect the price of a stock, but more often than not, the price of a share is driven by the intrinsic value of a company and how it is being reflected in the stock market. For example, if investors fear that a company might be in trouble because it might lose market share or its revenue growth might slow down, the stock price could drop. In contrast, if positive news about a company is released or it is announcing plans for future growth, the stock price might rise.
Many people invest in stock because they hope to achieve long-term returns that exceed those of other asset classes, such as bonds or real estate. These investors seek to grow their wealth over time through both increases in the share price and the recoupment of dividends. To maximize the potential return on their investments, they build diversified portfolios that include stocks from a variety of industries and businesses. In addition, stocks offer the potential to generate income through dividends and provide voting rights.
