What is a Stock?
- A stock is a piece of ownership in a company.
- In the short-term, share price changes based on the fickle opinion of the masses.
- In the long-term, a company’s true value is reflected in its share price.
More than just a slip of paper (or a computer record these days), a stock is a stake in a living, breathing business in which you share the rewards and the risks alike.
In order to raise capital, companies issue stocks for sale to the general public, which are then traded as the value rises and falls. Stocks are traded on various exchanges all around the world, the largest being the New York Stock Exchange (NYSE).
In the short term, a share price moves based on the opinion of the crowd: those people looking to buy or sell. When there are more people looking to buy, up the price goes. This is usually fickle, because the news of the day influences what the world thinks about certain stocks.
Over the long term, however, a company’s true value is reflected in its price, that’s why time – more than anything else – is the critical ingredient of successful investing.
As part-owner, you are entitled to a share of that company’s profits and assets. You also have a say in how that business is run. How much of those profits you have claim to and how much influence you have depends on the amount of stocks you own relative to the total number of shares issued.
Stocks are the backbone of a good investment portfolio and have proven to outperform every other form of investment in the long run. This is the main reason why we buy stocks.
