Stocks, company shares, equities—whatever you call them, they’re an important part of many people’s financial plans. But that doesn’t mean they’re easy to understand. Here are some basics that can help you get started.
Stock is a security that represents partial ownership in a publicly-traded company. It’s a claim on a company’s assets and earnings, and it’s what gives you the right to participate in decisions that affect the company. Stocks can also give you the potential to make money by increasing in value, or “appreciating,” over time.
The way stocks work is simple: Companies sell shares in their business to investors, who then buy those shares in the hopes that the company will grow and increase the value of their investment. When the company appreciates, the shareholders can sell their shares for more than they paid, making a profit.
This capital infusion is what makes the stock market such a powerful tool for companies. It can allow them to pay off debt or finance growth plans that they couldn’t (or don’t want) to fund with loans alone.
When companies first sell their shares on the stock market, it’s called an initial public offering or IPO. Investors can then purchase the stock, and once they do, they’ll be able to trade those shares from one person to another in the same way that they would a physical product.
There are different types of stocks, but most investors own what’s known as common stock. This type of share usually comes with voting rights and may pay investors dividends. Companies can also create different classes of shares, with each class having a unique set of benefits and restrictions for investors. For example, Class A stock might give you the right to vote, while Class B might not.
Generally, the more popular a stock is, the more it will cost. This is because supply and demand drive the price of a stock, with more people willing to buy it driving the price up, and less people wanting to sell it pushing the price down.
The price of a stock can also be affected by how well or poorly a particular company has performed, and the expectations of analysts about the company’s future. Investors are often rewarded for investing long-term in stocks that have historically posted strong returns, but this does not guarantee that you will receive positive returns in any given year or over a lifetime.
Stocks are typically traded on major exchanges around the world that follow national and local laws meant to protect the integrity of the market and ensure fair trading practices. These rules can include regulations on margin requirements, which are the amount of money that you must have available to purchase a certain number of shares, as well as prohibitions on naked shorting, which is selling stock that you don’t currently own.
The stock market is a global trading venue, and you can find up-to-the-minute prices for the most popular stocks on nearly any website. These prices are determined by supply and demand, as well as a variety of other factors that influence the market. For instance, government regulation and the presence of reputable trading centers can all impact how the market functions.
