Stocks may seem complex and confusing at first, but they’re an effective way to build wealth over time.
Stock prices are determined by supply and demand: when there are many investors looking to purchase or sell the same stock, its price increases; conversely if several want to unload theirs quickly, its value drops precipitously.
Basics
Stocks (equities) are securities representing partial ownership in a public company and traded across numerous exchanges. By investing in such stocks, investors become shareholders with voting rights at company meetings as well as potential for dividends or capital appreciation.
Companies are divided into large-cap, mid-cap, or small-cap categories based on their total market capitalization of shares. They can further be broken down by revenue, earnings and other metrics.
When researching stocks, it’s essential that you examine all available data – not just one or two pieces at a time. You can accomplish this by reviewing SEC filings (which can be found via your brokerage firm or major news websites such as EDGAR), key financial ratios and benchmarking the company against industry peers – something known as due diligence (DD). Doing this will enable you to create an accurate picture of what the business represents as well as its long-term prospects.
Companies
Stocks (also referred to as equities) found on the stock market represent ownership interests in public companies that raise funds by selling shares, with investors purchasing them in hopes that they’ll increase in value over time.
Stock prices fluctuate largely based on supply and demand in the market; an expanding company will likely see their share prices increase while those of shrinking businesses may see them decrease. Over the long term however, business performance will determine a company’s share price instead of simply what other firms are doing.
Investors can learn more about individual stocks by researching available information in databases, publications and websites. Independent research from analysts who aren’t affiliated with brokerage firms as well as consensus reports can also provide crucial insight. Utilizing such research helps a knowledgeable investor form an insightful narrative regarding why one stock may merit her long-term investments.
Markets
Financial markets are marketplaces where securities such as stocks can be bought and sold. Stocks, also referred to as equities, represent part ownership in public companies and provide claims on earnings and assets held by these organizations.
Companies raise capital through issuing shares of their business for sale to investors, which allows them to invest in growth and expand operations. IPOs help drive economic development and job creation while benefitting society at large.
Common and preferred stocks are two primary categories of shares; common stocks provide owners with voting rights and dividend payments while preferred shareholders typically take priority over common shareholders if the company goes bankrupt and liquidates its assets. Investors tend to group stocks into different sectors or industries so as to better understand their behavior – for instance when an economy slows, information technology, energy, telecommunications stocks may struggle while consumer staples and health care investments tend to rise alongside it; this helps investors focus on long-term investments and stay on target.
Trading
The stock market can be unpredictable and prices may change rapidly in response to company, industry, political, regulatory or market developments. Investors should carefully assess all the risks involved with investing, including potential loss of principal.
Many investors, particularly those investing through retirement accounts such as 401(k) or individual retirement accounts (IRA), hold stocks through mutual funds to take advantage of long-term stock performance without needing to do any trading themselves.
Long-term returns on stocks typically come in the form of dividends and capital gains. Companies that regularly pay out dividends are known as “dividend stocks.” Low-volatility stocks tend to belong to defensive sectors – industries which remain strong during economic downturns such as utilities, consumer staples and healthcare – providing a secure foundation to any portfolio and offering peace of mind to worried investors; such investments are known as blue chips.