A share of stock represents a fractional ownership stake in a company. It’s one of the primary tools for investors to grow their savings and plan for long-term financial goals like retirement and education. Stocks are typically bought and sold on the secondary market, where prices rise and fall based on a wide range of factors. When a company does well, the value of its shares rise and shareholders may be able to sell them for more than they paid for them. Companies also pay out dividends to shareholders on a regular basis. You can also earn returns from stocks through your employer-sponsored retirement plans (like 401(k)s), which invest in a broad group of stock of large and small companies to help diversify your portfolio.
A company issues its first shares of stock during an initial public offering, when it opens up to the general public. The money raised from the sale of those shares helps fund a business’s growth and operations. Once the IPO is complete, shareholders own shares of the company and can vote on certain decisions. They can also sell their shares of the company to others or cash them in at any time.
Stocks are considered a riskier investment than other types of investments, but they have historically offered higher returns than saving accounts or bonds. That’s because, over the long term, public companies grow their revenue and profits, which makes the value of their shares rise. You can invest in individual stocks, mutual funds, exchange-traded funds and even derivatives.
If you want to make the most of your investment, consider keeping a balanced portfolio that includes both stocks and fixed income assets, such as bonds or CDs. Diversification can help lower your risk, so you’re less likely to lose money if the stock market drops or the economy slows.
As a general rule, you should only purchase shares of publicly traded companies that you’re familiar with and understand. There are many different ways to evaluate a company, from its product or service offerings to the strength of its business model and competitive advantage. You can find more information on a company through its website, news releases and third-party sources like trading websites, newspapers and analyst reports.
Investors can also value stocks by comparing them against benchmarks, such as the market or sector index. This can help you see if you’re paying too much for a particular share or if it is undervalued. But, don’t rely on this approach alone – there are other ways to assess a company’s value that are more complex and may take longer to master.
