Whether you call it a stock, share, or equity, you’re describing the same thing: a stake in a company that gets you a portion of the company’s assets and profits. Stocks are most commonly traded on stock markets, although private sales do occur.
Stocks are the basis of most investment portfolios, and they are subject to government oversight to ensure fair practices. Historically, stock markets trend upwards and, for this reason, many investors opt into them as part of a long term investment strategy. Stocks can be bought from most online stock brokers.
What is the history of stocks?
Stocks have been around for thousands of years. Even during the time of the Roman empire, large, private companies would sell shares in order to raise cash and increase the size of their business. Later, joint-stock corporations were used by some monarchs for projects that they didn’t want to fund solely using government money. So, they’d offer investors the opportunity to take on a portion of the risk in exchange for profit if the project were to succeed. These corporations would fund everything from railroads and canals to transatlantic voyages.
Why do people buy stocks?
People buy stocks for a variety of reasons: to make a profit when the price of the stock goes up; for dividend payments, which is a portion of the company’s profits that get distributed to shareholders; and to have the ability to cast votes that influence the company.
Why do companies issue stock?
Companies get money when they issue stock. With that money, they can do a variety of things including reduce debt, introduce new products, expand their business into new sectors and markets, and improve or acquire new facilities.
How do people make money investing in stocks?
The stock market is prone to regular fluctuations, including long periods of growth and sustained-to-temporary declines. As a result, investing in stocks is sometimes less stable than investing in real estate, which delivers a regular monthly income. Historically, however, the stock market has demonstrated an upward trend. Long-term investors who keep their money in the market over time, even during dips, can benefit from positive returns on their investment, depending on their individual positions.
Investors make money in the stock market in two ways. Either the stock price increases during the period of ownership and is later sold for a profit, or the stock earns dividends, which is a percentage of the company’s profit that’s given to shareholders usually on a quarterly basis. Not all stocks, however, pay dividends. There are other financial instruments employed to make money using stocks. Those are more complicated, but still accessible to most investors.
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What affects share price?
Share prices are affected by numerous factors including but not limited to the worldwide economy, how well the sector is doing, government policy, natural disaster, geopolitics, and other temporal factors. Investor sentiment, meaning what investors think of the company, can also influence stock price.
The basics of stock investing
There are certain basics that investors learn when they’re first introduced to the stock market. These are general principles that help people generate income over time.
Play the long game
Some investors are able to weather the stock market’s fluctuations and hold onto their stocks long enough to make a profit. This involves patience during periods of downturn and a smart application of best practices to build a winning portfolio over time.
Diversify your portfolio
Portfolio diversification can entail a range of strategies, one of the most intuitive being understanding the dynamics across sectors and investing in companies from different corners of the market. This helps safeguard against isolated forces that might be harming companies in one area. On the contrary, market forces could also be positive. As such, many investors de-risk by seeking out a balanced portfolio that is well-represented across industries.
Save time by investing broadly
Investors who opt to put their money in individual stocks often spend a substantial amount of time studying the companies they choose to invest in, following their announcements, press coverage, and other publically available financial information. These investors will also spend time studying trends across sectors to understand the dynamics outside of the companies they invest in that could impact the businesses externally.
Given this added layer of legwork, many investors opt to invest in equity mutual funds, index funds, and exchange-traded funds, or ETFs. These options make it possible to purchase many stocks at once with the aim of building a diverse portfolio in fewer steps.
Growth and earnings
Investors will often consult a company’s revenue and earnings growth when making their purchasing decisions. Revenue growth indicates how strong a company’s sales are in a given period, and is, therefore, a reflection of how customers are reacting to the business. Earnings provide a more holistic view of the company and include metrics on the business beyond sheer top-line growth.
Together, these factors, while not the only signals used to make investment decisions, are among the most important and are generally believed to be strong indicators of the overall health of a business.
What types of stock are there?
Most stock traded on the stock exchange is known as “common stock,” although some companies also issue what’s known as “preferred stock.” These terms relate to the relationship between the stockholder, the company, and other stockholders.
Preferred stock
Those who hold preferred stock get preferential treatment. Preferred stock units are usually not traded on exchanges, nor do they come with any voting rights. Holders of preferred stock do, however, get to be the first ones to receive their dividends and often receive more dividends. Additionally, if the company goes bankrupt, preferred stockholders are the ones to receive payment first after the company’s assets are paid off.
Common stock
Common stock is the most common stock bought. Each share bought is equal to a single vote at a shareholder meeting. Common stocks often, but not always, entitle their owner to a portion of the company’s profits, which is known as a dividend. Sometimes a dividend can be paid in the form of more stock rather cash. In the case of large companies, dividends are usually paid out four times a year.
Not all companies pay dividends, and companies opt to withhold dividends for varying reasons. Sometimes these businesses choose to reinvest in the company and its growth with an ambition to create capital gains for shareholders. In general, growth companies are more likely to reinvest in the business, while more mature companies are more likely to pay out dividends to their shareholders.
What categories of stock exist?
The categories that stocks fall into are a reflection of the type of investment that they are.
Growth stocks
Investors will target growth stocks if they want to make money as the price goes up. The value of growth stocks can increase at a greater pace than the rest of the market. Such stocks do not pay dividends, as they are often offered by early- to mid-sized companies.
Income stocks
Income stocks are purchases for the income they regularly generate through consistently providing dividends. A secure utilities company is likely to be an income stock.
Value stocks
The price to earnings ratio (PE) is how much investors are willing to pay for the amount of profit a company generates. A low PE means the stock will cost less. A value stock is a stock that, for whatever reason, has inspired less confidence in investors, leading to a low PE, despite being a growth or income stock. The hope is that when you purchase a value stock that you’re investing in an undervalued company that you believe will bounce back for a return on your investment.
Blue-chip stocks
Blue-chip stocks are the term for stocks issued by companies with name recognition that experience consistent growth and usually pay dividends.
What is an IPO (initial public offering)?
When a company first decides to go public, it issues stock for the first time. This is known as the “initial public offering,” or IPO for short. When large companies have an IPO, investors can expect for there to be big gains and large fluctuations in the first few weeks. That’s due to the fact that the reason many companies go public is to raise money.
What is a stock dividend (split)?
A split is what occurs when a company decides to give more stock to shareholders based on how much stock shareholders already have. This is likely to occur following an IPO. The company may give one stock for every ten you have, for example, which would make the general price decline 10 percent, even though the general value of all the stock owned by each shareholder would remain the same (the value would just be distributed amongst more stock). If the dividend is big enough it’s called a “stock split.”
What are the benefits of stock ownership?
The biggest benefit of investing in stocks is that they reward long-term investment. For example, if an investor holds onto a stock for 15 years or more, historically they would be rewarded with a profit so long as the net movement of that stock increased over time. This is due to the market’s generally upward trend over time, although there have certainly been numerous companies that bucked the trend. The likelihood of profit is even greater for those with a diverse portfolio.
There are two primary reasons a company would offer dividends. Dividends generate attention, and just having more shares is likely to cause people to buy and sell more stock simply because each stock occupies a smaller portion of their total investments. Dividends also lower the price of the stock for the simple reason that it makes stocks more affordable, which may encourage more people to buy stocks and, ultimately, increase profit.
Bottom line
Investing in the stock market may seem like joining an exclusive club because, on the surface, it requires time, money, and esoteric knowledge. But technology is changing the dynamic of stock investing by making it more accessible to more people. With online brokers and other tools, everyday investors can independently invest in the stocks they believe in. What’s more, fractional investing, which enables investors to buy into portions of a total stock, has lowered the barrier to entry even further.
As the public markets continue to become democratized, investors are using research and the vast information made available via the Internet to build and maintain portfolios to match their investment goals.