Investing in stocks is how ordinary people build wealth by owning a piece of some of the world’s largest companies. Stocks (also called equities) represent ownership of a fraction of the company, and can be bought and sold on a stock exchange or by direct agreement between investors. Owning shares doesn’t necessarily mean you carry a lot of weight within the company or get to rub elbows with the company bigwigs. What it does mean is that, ideally, you can make money as the company grows and its profits rise — although losses are also possible.
A company issues stock to raise money, and its share price fluctuates up or down depending on supply and demand, as well as market conditions. A publicly traded company will typically begin by offering its shares in an initial public offering, or IPO. This is where the excitement around stocks really begins, as investors flock to this market where they can buy and sell shares of their favorite companies.
Stock can be used by private businesses as well, but they don’t have the benefit of a public market where their share prices can fluctuate, and they may not be able to offer the benefits of the public markets, such as being able to sell shares in order to raise capital and to gain access to potential buyers. Private businesses that issue stocks often do so in the form of stock options, which have a similar effect to regular shares, but don’t give the shareholders voting rights at shareholder meetings.
If you want to learn more about stocks, you should know that there are many different ways to categorize them. One way is by size of the company, with large-cap stocks being the largest companies and small-cap stocks being the smallest. There are also a number of ways to value a stock, including using ratios like price-to-book and price-to-earnings. These ratios can be helpful, but it’s important to remember that each company creates and makes value in a slightly different way, so these valuation methods aren’t necessarily universally applicable.
In addition to these quantitative metrics, you should also consider qualitative factors when evaluating a stock’s value. For example, you might look for a company with a defensible economic moat, such as patents or a network effect that makes it easier to retain customers.
A key element of successful inventory management is keeping safety stock, which is an amount of inventory that’s kept slightly above the minimum necessary to keep production running smoothly. A savvy business owner will keep this buffer, so that they can quickly meet increased demand or replace faulty goods without incurring any lost revenue while waiting for new production to come online.
While the long-term history of stocks has been strong, they’re not guaranteed to perform well every year, and even the best companies can lose their stock prices over time. For this reason, it’s wise to diversify your holdings by investing in a variety of stocks. You can also reduce the risks of owning stocks by balancing them with other kinds of assets, such as bonds.