Stock, or equity shares, are ownership stakes in a business. When a company does well, the value of its stock rises, and shareholders reap the benefits. Similarly, if a company struggles or fails, the value of its stock drops. Stocks are a staple of most investment portfolios because they offer higher long-term returns than bonds. However, they also expose investors to significant near-term risks. For this reason, prudent investors should aim for a high level of diversification when investing in stocks.
When you invest in a stock, you are purchasing ownership shares in a public company. These shares represent a proportional claim on a company’s net assets and future earnings. This translates into a right to vote in shareholder meetings and receive dividend distributions when and if they are paid. Shareholders are also entitled to the sale of their shares in the event of a company acquisition or bankruptcy.
A stock’s price can fluctuate depending on the supply and demand of a particular company’s shares in the market, as well as the overall economic environment. This is why it’s important to follow the market and stay up to date on news affecting the economy, interest rates, or investor sentiment.
Whether you’re buying stocks to diversify your portfolio or as a source of income, understanding the basics of stock investing can help you make informed decisions. Aside from knowing what you’re investing in, it is also critical to understand how to value a company. Valuing a company can help you determine whether or not you’re paying too much for a stock. There are a variety of ways to value a company, but the most effective methods vary by industry. For example, a bank’s valuation should be based on its assets and earnings. A retailer, on the other hand, should be valued primarily by its ability to sell products and make profit.
In addition, it’s important to note that not all stocks are created equal. Many companies issue different classes of shares, each with specific voting rights or priority to profits and liquidation proceeds. For instance, Alphabet, the parent company of Google, issues class A, B, and C shares, each with a unique voting percentage.
During an initial public offering (IPO), the company and its advisors disclose how many shares of stock will be issued and set the IPO price. Once the stock is listed, it can be traded on the secondary market, or “the stock exchange,” where its price rises and falls based on a variety of factors. Traders can also compare the performance of individual stocks to a benchmark, such as the S&P 500 or the Toronto Stock Exchange Composite Index, to get an idea of how they’re performing in comparison to other securities in their respective sectors.
