What are Stocks and How Do They Work? Bankrate Caret RightMain Menu Mortgage Mortgages Financing a home purchase Refinancing your existing loan Finding the right lender Additional Resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Bank Banking Compare Accounts Use calculators Get advice Bank reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Credit Card Credit cards Compare by category Compare by credit needed Compare by issuer Get advice Looking for the perfect credit card? Narrow your search with CardMatch Caret RightMain Menu Loan Loans Personal Loans Student Loans Auto Loans Loan calculators Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Invest Investing Best of Brokerages and robo-advisors Learn the basics Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Home Equity Home equity Get the best rates Lender reviews Use calculators Knowledge base Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Loan Home Improvement Real estate Selling a home Buying a home Finding the right agent Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Insurance Insurance Car insurance Homeowners insurance Other insurance Company reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Retirement Retirement Retirement plans & accounts Learn the basics Retirement calculators Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Basics of Stock Market Investing Advertiser Disclosure
Advertiser Disclosure
We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Our articles, interactive tools, and hypothetical examples contain information to help you conduct research but are not intended to serve as investment advice, and we cannot guarantee that this information is applicable or accurate to your personal circumstances. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. How We Make Money
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. Editorial disclosure
All reviews are prepared by our staff. Opinions expressed are solely those of the reviewer and have not been reviewed or approved by any advertiser. The information, including any rates, terms and fees associated with financial products, presented in the review is accurate as of the date of publication. SHARE: Superb Images/Getty Images November 09, 2022 Checkmark Bankrate logo How is this page expert verified? At Bankrate, we take the accuracy of our content seriously. "Expert verified" means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced. Their reviews hold us accountable for publishing high-quality and trustworthy content. Greg McBride, CFA, is Senior Vice President, Chief Financial Analyst, for Bankrate.com. He leads a team responsible for researching financial products, providing analysis, and advice on personal finance to a vast consumer audience. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Chloe Moore, CFP, is the founder of Financial Staples, a virtual, fee-only financial planning firm based in Atlanta and serving clients nationwide. Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our investing reporters and editors focus on the points consumers care about most — how to get started, the best brokers, types of investment accounts, how to choose investments and more — so you can feel confident when investing your money. Investing disclosure: The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal. Bankrate logo Editorial integrity
Bankrate follows a strict , so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. Key Principles
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers. Editorial Independence
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. A stock represents a piece of ownership in a corporation. Stocks are also known as equities, which signifies that anyone who owns them has a stake in the company’s performance. The stock market’s movements are always in the headlines, which can scare some people away from investing in stocks. According to a , 26 percent of Americans believe stocks are the best long-term investment, while 17 percent prefer cash. While cash investments are less volatile than stocks, cash is nearly certain to lose value over time as inflation erodes its value. People buy stocks to earn a return on their investment, which allows them to grow their wealth and achieve financial goals like retirement. Here’s what else you need to know. What does it mean to own a stock
Owning a stock is a little different than if you owned 100 percent of a private business. Owning a share of stock gives you a partial ownership stake in the underlying business. Stock prices are quoted throughout the trading day, which means the company’s market value and your stake frequently changes. If you owned a business by yourself or with a small number of partners, you wouldn’t get a quote on the business every day or maybe not even each year. Another big difference between owning a stock and owning your own business is decision-making control at the company. When you own a stock, the company’s management team and all its employees work on behalf of shareholders to build value. The company’s board of directors are there to represent the shareholders’ interests and can make changes to management it deems necessary. You’d be much more involved in the day-to-day decision making of a company you owned on your own or with partners. While these differences exist, it can be helpful to remember that stocks still represent a stake in an actual business. Sometimes people are captivated by the changing prices on a screen and think they need to be buying and selling stocks frequently, but they’d never behave that way if they owned the entire business. How stocks work
When a corporation is looking to grow, it needs money to help pay for expenses such as designing new products, hiring more people and expanding into new markets. They issue new shares of stock to help raise that capital. Anyone who buys those stocks is poised to profit if that growth becomes a reality. How do you make money from stocks
There are generally two ways: Price appreciation. A company’s stock price will typically rise as the earnings and future prospects of the company’s business improve. Over the long-term, earnings growth is a major driver of stock prices so it’s important to identify companies whose businesses are likely to do well. Dividends. Some companies also pay , which are a way for them to share a portion of their profits with shareholders. These regular payments are typically made quarterly and can account for a large portion of investors’ returns over time. If a company pays an 18 cent dividend each quarter and you own 10 shares, you’ll receive $1.80 with each payment. Though rare, there can also be stock dividends, which reward shareholders with additional shares. It’s important to note that dividends are not guaranteed. Companies can slash their dividends. Not all companies pay them, either. Younger, rapidly expanding companies often don’t pay dividends. Instead, they reinvest all profits back into the company with the hopes of growing further and generating more profits that will ultimately lead to a higher stock price. What are the downsides of stocks
While stocks offer the potential for growing your money, the appeal of those returns comes with some sizable . If the company falls on hard times, posts losses or misses their earnings expectations, the . Wherever the stock goes, your money follows. There’s a chance you could lose all your money, too. For example, if a business that you invested in closes its doors, your investment is likely gone for good. Stock investors are last in line when it comes to claims on the assets. Employees, vendors and bondholders are all in line to get paid before the stockholders. How can you invest in stocks
The stock market is accessible to everyone, and there are two ways to own stocks. Direct ownership
You can buy stock in individual companies through a . As competition has increased in recent years, no longer charge commission fees. So, rather than paying to invest, you’ll be able to put all of your money into your investment. Some companies such as , Coca-Cola and Home Depot also offer direct investment plans, which allow you to buy shares from them — bypassing the need to open a brokerage account altogether. While direct investing can put you in the driver’s seat, it also creates a massive workload. Studies have shown that building a of individual stocks requires holding approximately 30 different stocks. (Diversification refers to owning a range of assets vs. holding just one or a small few. This reduces the overall risk in your portfolio.) That’s 30 different companies to monitor, tracking how their business is performing and whether they are on a positive trajectory — a tall order that requires a great deal of time and expertise. Indirect ownership
Indirect investing is a much easier approach and is a great way for . Rather than reading annual reports, comparing performance data and hand-picking stocks, you can own stocks through a or an . These funds invest in hundreds — sometimes even thousands — of stocks. Instead of tying your fortunes to a single company, you can benefit from exposure to a wide range of companies. Think of this as instant diversification from the first dollar you invest. Do you have to buy one full share
It’s important to note that owning stocks doesn’t mean you need a mountain of money. is available via many brokerages, and it allows you to invest a small amount — as little as $5 — in a company. An indirect investment will also spread that money into smaller fractions across companies. For example, buying one share of a fund might make you an investor in , and a number of other high-profile companies. Bonds vs stocks What s the difference
In addition to buying stocks, many investors include in their portfolios. To raise capital, corporations can also issue bonds, but buying one does not make you an owner. Instead, you are making a loan to the company, and the bond comes with a maturity date. The best-case scenario of owning a bond is that you get your money back on that date with some additional interest paid out along the way. Bonds have a higher priority of repayment in the event of a company’s liquidation, which means they are safer than stocks – though you can still . It’s also worth noting that bond prices and interest rates move inversely to one another. So as interest rates rise, bond prices fall. Note: Bankrate’s also contributed to an update of this story. SHARE: Greg McBride, CFA, is Senior Vice President, Chief Financial Analyst, for Bankrate.com. He leads a team responsible for researching financial products, providing analysis, and advice on personal finance to a vast consumer audience. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Chloe Moore, CFP, is the founder of Financial Staples, a virtual, fee-only financial planning firm based in Atlanta and serving clients nationwide.