A stock is a stake in a publicly traded company. Purchasing a stock gives you ownership of part of the company, which means you can earn returns in two ways: dividends (a share of the company’s profits) and when the company is deemed to be worth more than it was before (capital appreciation).

Stocks are listed on exchanges like the NYSE or Nasdaq, where people looking to buy match up with those who want to sell. Brokers facilitate the trade, which happens almost instantly. Stocks rise and fall in price according to the laws of supply and demand. If many investors are interested in a stock, its price will go up; if more investors are selling than buying, its price will drop.

Investors may choose to diversify their portfolio by buying stocks in different companies and industries. This is done to reduce their risk and increase their return potential. Companies with defensible economic moats are able to protect their business model from new market participants; those with large user bases are able to leverage network effects; and high-quality brands often have intangible assets like intellectual property and consumer trust that add to their value.

While nothing is guaranteed with investing, those who stick with stocks over the long term have historically received strong returns. But if you’re planning to invest in stocks, it’s important to consider how much volatility you can handle, and make sure you know your risk tolerance.

Understanding Stock Volatility

The amount of money that investors make from investing in stocks depends on a variety of factors, including how much the stock returns, how much it costs to purchase, and its market performance over time. The yield of super-safe 10-year government bonds is typically used as the benchmark rate of return for stocks, and the historic market risk premium reflects how much the market is compensating its investors for taking on the extra risk.

Stock price changes can happen for any reason. For example, a stock can drop if investors are concerned about the company’s financial health; a recession may prompt investors to flee the market; or a change in regulations might limit a company’s ability to operate. However, these events typically have a short-term impact on the overall market and shouldn’t be seen as reasons to avoid or delay investing in stocks.

It’s also important to remember that a stock’s price is always a function of supply and demand. At any given moment, a stock’s price is equal to the sum of its supply and demand; the supply is represented by its float, which is the number of shares that are available for sale; and the demand is the number of investors willing to buy at that specific moment. A stock’s price will move in order to reach equilibrium. As a result, the tight ranges that you see on a stock chart indicate that institutional investors are holding onto their shares. They’re waiting for the stock to make a bigger jump, so they can sell their shares and recoup some of their losses.