Stock, company shares or equities—whichever term you prefer, they are a crucial part of any investment portfolio. But understanding them can be tricky, especially if you’re just starting out in the market. This article is intended to help you understand what stocks are, how they work and how they fit into your financial plan.
A stock is a partial ownership stake in a publicly-traded company, giving shareholders claim to a portion of a company’s earnings and assets. Stocks are traded on stock exchanges, such as the New York Stock Exchange and Nasdaq, where investors buy and sell them. Companies list their stocks in order to raise money from everyday investors, which can then be used for company expansion or growth plans that may otherwise be impossible to finance with loans alone.
In the long run, a company’s shares can also be valuable because their price appreciates—in other words, they become worth more than what investors paid for them. This is called capital appreciation, and it can occur when a company does well financially or when its product becomes more desirable. The value of a stock can also increase due to changes in the general market, such as interest rates or economic trends.
A company’s shares can be sold at any time, but there are certain tax implications associated with doing so. For example, in jurisdictions with income taxes, a stock seller will need to pay capital gains taxes on any earnings from the sale. In addition, depending on how a share was bought, it may be subject to various types of brokerage fees or trading costs.
Stocks are generally considered one of the safest investments because they are less likely to lose value than other types of investments, such as bonds or real estate. However, this doesn’t mean they are risk-free and there is always the possibility of a loss. Choosing the right stocks to invest in and diversifying your portfolio can help mitigate this risk.
There are many different tools that can be used to evaluate a stock, from looking at its intrinsic value to its current market price. The latter can be influenced by a number of factors, including demand and sentiment, so it doesn’t necessarily reflect a share’s fundamental value.
Other stock evaluation tools can include comparing a stock to its industry peers and looking at its earnings per share. There are also analyst reports available that provide insights into the broader market and individual companies. However, relying on these reports alone could be dangerous because they often contain a lot of speculation and bias. For this reason, it is important to use these tools alongside your own research and analysis when making decisions about which stocks to buy and sell. Finally, it’s also important to keep in mind that a stock’s price can be impacted by things beyond a company’s control, such as government policies or global market conditions. This can make it difficult to predict how a stock will perform in the short term.
