If you’re new to investing, you might wonder how stocks work. At times, the stock market can offer better returns than a CD or savings account. But what does it mean when you invest in the stock market? What are you actually investing in?
Whether you’re looking to invest for retirement or you have extra cash you want to use, understanding what stocks are and how the stock market works can help you make smart investment decisions and avoid common pitfalls.
Stocks are a kind of financial instrument that gives the owner a fractional share of the issuing company.
Stocks are traded on an exchange, and the value of these stocks can fluctuate over time.
Knowing how to make sound investment decisions can take the stress out of investing so you can focus on your long-term goals.
A stock (also known as equity) is a type of financial instrument that represents fractional ownership of the company that issued the stock. Each unit of stock is called a share, and each share grants the shareholder ownership of a part of the company.
Investors with more shares may potentially earn more from the company and may be able to have greater control over some decisions made at the company.
To understand stocks, think of a business run by five partners. Each partner works together and has an equal ownership of the company. In other words, each person has one share (out of five possible shares) in the company, that share confers the right to a proportional amount of the profits if the company decides to distribute profits vs reinvest and voting power.
When corporations go public, they issue stock on an exchange. When investors buy this stock, they contribute funds to the company that helps them grow. In return, some of those investors now have the right to vote in shareholder meetings, receive announced dividends, and sell the stock to other investors.
There are a variety of stocks available to shareholders, but most investors will buy one of two types of stock: common stocks and preferred stocks.
As the name suggests, common stocks are the most popular type of stock individual investors buy. Owning a common stock allows investors to have voting rights and earn dividends. Common stocks also have the potential for higher long-term returns but are also more volatile.
These types of stock give preferred stockholders different treatment when paying dividends (distribution of profits). They are paid before common stockholders and generally earn higher dividends that are fixed. The returns are often lower, even over the long term, and are less volatile in day-to-day dips and spikes. Preferred stock owners do not have voting rights.
Stocks can be classified into many different types, such as small-cap, mid-cap, and large-cap stocks, international and domestic stocks, and growth and value stocks.
The stock market consists of exchanges, such as the New York Stock Exchange (NYSE) and the NASDAQ, where stocks are listed. Buyers and sellers come to the stock market to buy and sell shares of stock in companies, which is facilitated by a brokerage firm.
When an investor buys stock, they are hoping that the stock will go up in value. The ultimate goal of an investor is to sell the stock for a profit.
The stock market fluctuates and is based on supply and demand. If more investors are buying the stock than selling it, the demand for that stock goes up and the value tends to increase. This often results when investors believe the value of the company’s stock will increase as a result of strong financial performance or other market factors.
Conversely, when investors believe a stock will perform poorly, they’ll sell it, which floods the market with supply and decreases demand. This lowers the price of the stock. Public Trends shows stock performance over time, helping investors understand long-term movements in stock prices.
In addition to purchasing individual stocks, some investors choose to buy shares in an index fund. These index funds buy a selection of stocks or other assets. To purchase stock, investors need a brokerage account, like those offered by Public.
Investors who want more guidance on their investments may opt for Public Premium, which offers company-specific insights from leading analysts that can help investors decide which stocks may be appropriate for them.
When it comes to investing, the most challenging part is learning the basics of the stock market and understanding the different terms used by investors. Here are a few key terms you’ll see used by investment professionals:
An exchange is the middleman that connects buyers and sellers who want to trade stocks, bonds and other securities. A well-known example is the New York Stock Exchange (NYSE).
Stock exchanges play a vital role in the global economy by facilitating securities trading. Exchanges such as the NYSE and Nasdaq are adapting with advanced trading platforms for both retail and institutional investors, while evolving regulations ensure stability and security in the market.
Stock indexes (or stock indices) are statistical measures that track the performance of a specific group of stocks in a particular market or sector. They serve as benchmarks for evaluating the overall health and direction of stock markets, allowing investors to compare the performance of their investments against the broader market or specific segments.
The three most popular indexes in the US are the Dow Jones Industrial Average, Nasdaq Composite, and the S&P 500.
Still unsure about what investing terms mean? Using Public’s social investing feature, you can reach out to fellow investors who can help you understand how to invest in certain stocks or industries.
When a company decides to go public, there will be an initial public offering (IPO) where investors can purchase shares in the company. The company will work with investment bankers to set a primary market price. That initial price is determined by the valuation of the company and perceived demand in the market. These shares will then be offered to preferred institutional and individual buyers.
Companies choose to IPO on a certain exchange, like the New York Stock Exchange (NYSE) or NASDAQ. After the initial offering, the stock becomes available to all individual investors trading on that exchange. At this point, the share price will start to fluctuate based on what buyers are willing to pay and what sellers are willing to accept.
Supply and demand can have a big impact on the stock market. As a company becomes more valuable over time, stock prices can rise, making those stocks valuable to their stockholders.
The stock market experiences fluctuations due to various factors, and understanding these can help investors make informed decisions. Here are some key reasons why the stock market moves:
Understanding these factors can help investors navigate the complexities of the stock market and make more informed investment choices.
Anyone can trade shares of stock. Let us understand how it works.
Step 1: Open a brokerage account. You can sign up with Public for your brokerage account, its fast and easy.
Step 2: Decide what stocks you’d like to invest in, depending on your interests and budget.
Step 3: Public social investing tools let you communicate with other investors, while the Top Movers tool can help you identify stocks that are rapidly increasing or decreasing in value.
Step 4: Find the stocks you want to buy on Public and specify the number of shares. At this point, you can also set a limit order, which is the maximum price you are willing to pay for the stock.
Step 5: Public will relay your order through a stock exchange and will buy or sell your shares at the going price for that stock.
Step 6: After the sale has been finalized, the transaction will be available in your Public account.
Investing in the stock market can be exciting, and Public’s suite of social tools and professional guidance can help you learn how to navigate the market and decide on an investment strategy. Here are a few things to keep in mind as you start to invest.
1. Keep your emotions in check:
Volatility in the stock market should be expected. When you become emotional about investing, you can make poor decisions and derail your goals.
2. Choose your investments based on facts:
Before choosing your stocks, research the background and financial stability of the company. Remember, when you buy stock in a company, you become a part-owner, so consider the stock price target. Public Premium users get access to insights from Morningstar, which can help investors make smarter decisions.
3. Take it slow:
Investing in the stock market involves a long time horizon. Start out slow and keep in mind that your strategy should ensure that you can ride out market fluctuations.
4. Diversification is key:
The most important thing you can learn about investing is to diversify your assets. Owning stocks in a variety of markets and adding other types of investments can give you a well-balanced portfolio that doesn’t rely on one company’s success, allowing you to recover from a loss more easily.
Pro tip: While thorough research can provide valuable insights, the stock market is influenced by various unpredictable factors such as market sentiment, economic shifts, and global events. Therefore, diversifying your portfolio and managing risks is crucial to mitigating potential losses, even with strong research.
While thorough research can provide valuable insights, the stock market is influenced by various unpredictable factors such as market sentiment, economic shifts, and global events. Therefore, diversifying your portfolio and managing risks is crucial to mitigating potential losses, even with strong research.
Investing has many moving parts. Luckily, Public is here to help. Our community of investors can answer your investing questions, helping you feel more secure as you start out. On Public Live, industry professionals offer commentary on the market and useful information for new investors.
Ready to start investing? Download the Public app to get started.
Investors buy stock at a certain price, which is based on the current market conditions. If the price of a stock goes up, investors can sell the stock for a profit. If the price goes down, investors may be selling at a loss.
The stock market is unstable, and the price of an individual stock can increase or decrease. It is possible to lose money in the stock market.
Stocks confer partial company ownership and can be bought and sold through exchanges. Bonds are loans from the investor to a company or government that generate a fixed return over their duration and are less liquid.
The Dow Jones Industrial Average is one of the three most popular stock market indexes in the US.
There’s no set moment for when a certain stock will reach its full potential. However, investing in the stock market requires a long time horizon, so it’s best to think of your investments in terms of their long-term value.
