The word stock refers to the shares by which ownership of a company or corporation is divided. Stocks are traded on the stock market, which is also known as the “financial markets.” In addition to being one of the most popular investment vehicles, stocks help individuals grow their savings for retirement and other long-term goals. However, stocks are not without risk, and it is possible that they will lose value.
As a result, investors seek to buy stocks when they are low and sell them when they are high in order to make a profit. Among the many ways to gauge whether a stock is fairly priced, valuing it against similar companies in the market can be helpful.
When a company offers its first stock for sale to the public, it works with investment bankers to set an initial market price during the initial public offering (IPO). This is often the first time that investors can get in on the ground floor of a growing business. After the IPO, the company’s shares start trading on the secondary market, where their prices rise and fall depending on a wide variety of factors.
Investors who own stocks can make money through dividend payments and the capital gains that accrue as the value of the shares rise. They can also participate in shareholder meetings and receive voting rights, depending on the company. Moreover, many investors use a portfolio of different stocks from various industries to diversify their investments and mitigate risk.
In addition to a company’s financial condition and operational capabilities, a stock’s value is determined in the marketplace by a number of critical internal and external factors, such as economic conditions, market sentiment and interest rate direction. For instance, a company that is heavily in debt may have less room for growth and could face a reduction in its stock price.
The amount of money that a person invests in a stock is referred to as his or her equity. This is often calculated as the current share price of the stock, minus the purchase price paid for it. However, a more accurate metric is the company’s total return over a certain period of time, which takes into account both the initial and final values of the stock as well as any associated dividend or interest payments.
Most publicly-traded companies list their shares on the national or regional stock exchanges. The NASDAQ and New York Stock Exchange are two of the most prominent national stock exchanges. However, large foreign companies sometimes list their shares on U.S. stock exchanges in order to broaden their investor base. These companies may maintain a block of shares in their home country, and then work with a U.S.-based holding bank to create American depositary receipts, or ADRs, which are traded on the U.S. stock market as if they were domestic shares.
In addition to the underlying value of the stock, the instantaneous price at any given moment is a function of supply and demand. The supply is the total number of shares that are available to be sold at any given moment, and the demand is the number of shareholders who want to buy them. The product of this instantaneous price and float is the stock’s current market price.
