How Stocks Work


A stock is a security that represents partial ownership of a company. Companies often issue shares to raise money and grow their businesses, and those shares can be bought and sold on a public market like a stock exchange. The share price is the current market appraisal of the company’s worth at that moment, and it can fluctuate up or down based on investor demand and other factors. In the long term, though, stocks tend to rise in value. That’s why many people invest in them over the long term, and why they may end up seeing their original investments grow substantially.

To understand how stocks work, consider this example: If you wanted to start a cupcake business but only had $1,000 to get started, you could ask friends to chip in. In return, you’d give each friend 20% of your cupcake business and let them participate in any profits the business makes. That’s a lot like how stocks work, only on a much bigger scale.

The value of a single share of stock is usually expressed as a percentage (%) of the total amount of all outstanding shares. This is called the market capitalization of the company, and it can be a useful way to compare the size of different companies.

A company issues shares of stock to the public to raise funds to grow their business, and those shares can be bought and sold in a public market, just like any other commodity on a trading floor. Companies can also choose to issue dividends, payments made out of the company’s revenue that are shared with shareholders. Not all companies pay dividends, but when they do, the value of your shares can increase over time as a result of this extra cash.

There are a number of different ways to buy and sell shares, including through a brokerage account. A brokerage can be an actual person that you tell what you want to buy and sell, or it can be an online platform that lets you input your trades electronically. In either case, when you place a buy or sell order with a broker, the transaction is done on a trading exchange, and it’s recorded in the records of that exchange.

Stocks can also be purchased as part of a mutual fund or an index fund. These are pre-arranged “baskets” of investments that can help you diversify your portfolio, and they can be found in a variety of investment accounts, from tax-deferred retirement accounts to taxable brokerage accounts.

The main risks associated with investing in stocks are that you can lose money if you buy and sell at the wrong times, or if the markets as a whole experience a major decline due to wider economic changes. However, you can mitigate these risks by staying invested for the long term and building a diversified portfolio. Investing in stocks can also be a good way to build wealth over the long term, helping you meet financial goals such as retirement or homeownership.