WHAT ARE STOCKS?
A stock is an investment. When you purchase a company’s stock, you’re purchasing a small piece of that company, called a share. Investors purchase stocks in companies they think will go up in value. If that happens, the company’s stock increases in value as well. The stock can then be sold for a profit.
Stocks are securities that represent an ownership share in a company. For companies, issuing stock is a way to raise money to grow and invest in their business. For investors, stocks are a way to grow their money and outpace inflation over time.
HOW DOES IT WORK?
When you own stock in a company, you are called a shareholder because you share in the company’s profits. Public companies sell their stock through a stock market exchange, like the Nasdaq or the New York Stock Exchange. Investors can then buy and sell these shares among themselves through stockbrokers. The stock exchanges track the supply and demand of each company’s stock, which directly affects the stock’s price.
Stock prices fluctuate throughout the day, but investors who own stock hope that over time, the stock will increase in value. Not every company or stock does so, however: Companies can lose value or go out of business completely. When that happens, stock investors may lose all or part of their investment. That’s why it’s important for investors to spread their money around, buying stock in many different companies rather than focusing on just one.
If you have a 401(k), you probably already own stock, though you might not realize it. Most employer-sponsored retirement plans invest in mutual funds, which can hold a large number of company stocks pooled together.
Stocks carry more risk than some other investments, but also have the potential to reap higher rewards. Stock investors earn money in two main ways:
- If the price of a stock goes up during the time they own it, and they sell it for more than they paid for it.
- Through dividends. Dividends are regular payments to shareholders. Not all stocks pay dividends, but those that do typically do so on a quarterly basis
You can buy individual stocks through an online broker. The process of opening a brokerage account is similar to opening a bank account. The commissions charged by online brokers for stock trades vary, so it’s important to shop around.