Stocks represent ownership in a company. When an individual buys a stock, they are purchasing a share of that company’s equity, which gives them a claim on part of its profits and assets. Stocks are one of the most common investment vehicles and form the backbone of most long-term wealth-building strategies. They are traded on exchanges such as the New York Stock Exchange or Nasdaq, where buyers and sellers meet to set prices based on supply and demand.
Why Companies Issue Stocks
Companies issue stocks as a way to raise capital. Instead of borrowing money and paying it back with interest, they sell ownership stakes to investors. The money raised can be used to expand operations, fund research, pay off debt, or enter new markets. In exchange, shareholders get a piece of the company and the possibility of benefiting if the business grows in value.
Types of Stocks
Not all stocks are the same. The two main categories are:
- Common stock: This is what most people think of when they hear “stock.” Owners of common stock can vote on corporate matters and may receive dividends, but their returns depend on how well the company performs.
- Preferred stock: This type pays fixed dividends and has priority over common stock if the company faces bankruptcy. However, preferred shareholders usually do not have voting rights.
There are also different classes of stock within the same company, often labeled as Class A, Class B, and so on, each with different voting power and dividend policies.
How Investors Make Money with Stocks
There are two primary ways to earn from stocks:
- Capital appreciation: When the price of a stock rises above what an investor paid, the difference is profit if they sell.
- Dividends: Some companies distribute part of their earnings back to shareholders as regular payments. Dividends provide income in addition to price growth.
Some investors focus mainly on growth stocks, aiming for appreciation, while others prefer dividend-paying stocks for steady income.
Risk and Volatility
Stocks offer higher potential returns than most other asset classes, but they also carry more risk. Prices can move sharply due to company earnings reports, economic changes, industry shifts, or investor sentiment. Market downturns can wipe out value quickly, but long-term historical data shows that diversified stock investments tend to recover and grow.
Stock Market Indices
To measure overall market performance, investors look at indices such as the S&P 500, Dow Jones Industrial Average, or Nasdaq Composite. These indices track groups of stocks and serve as benchmarks for both individual and institutional investors.
Long-Term Role of Stocks
For most investors, stocks are essential to building wealth over decades. They tend to outpace inflation, reward patience, and compound effectively when dividends are reinvested. While short-term traders focus on timing price moves, long-term investors benefit from simply holding through market cycles.