When you invest in stock, you own a share of the ownership of a publicly traded company. Each share has a market value determined by the overall supply and demand for shares on any given day. The price of a stock can rise or fall, depending on a variety of factors, including economic trends and company news, such as a product recall. While stocks have a long history of providing solid returns for investors, you can also lose money by investing in them. The key to successful investing is not focusing on the short-term price fluctuations, but rather making your own judgments of value and building a well-rounded portfolio of stock investments in various industries and geographic areas.
Stocks are considered securities, a class of investment assets that are governed by laws set forth by the Securities and Exchange Commission. The SEC requires all public companies to disclose financial information in periodic reports filed with the SEC. This includes balance sheets, income statements and cash-flow statements. These documents provide important insight into the health of a company and can help you determine whether a stock is worth buying or selling.
In addition to a company’s operating cash flow, a cash-flow statement will reveal how much revenue is being received by the company over time. You can compare this information with the amount of debt a company is carrying, which may influence your decision to buy or sell shares.
An investor’s primary goal is to buy shares of a company that are undervalued. This can be difficult, because a stock’s price is constantly fluctuating on the market. To get an idea of a stock’s true value, you can look at the company’s earnings, sales growth over time and other metrics such as the price-to-earnings ratio. Legendary investor Benjamin Graham once suggested that you should never buy a stock that is selling for more than 1.5 times its book value.
If you buy a stock and it rises in value, you can sell your shares for a profit. This is known as appreciation. The goal is to have a diversified portfolio of stocks that will increase in value over the years, but you must understand that the average annual return for stocks is less than 10% and that a single stock might lose value. If you own a stock that increases in value, you will benefit from dividend payments — a portion of the company’s profits — and the potential to sell your shares at a higher price in the future.