A stock is an investment in a corporation, usually traded on a public exchange.
Companies must raise money to conduct business, make investments and otherwise finance growth. One way they can do that is by offering small portions of the company itself to outside investors.
Those portions, known as shares of stock, are sold via investment banks to investors. Sold to the public once, those same shares can be traded among investors via the stock market.
The value of a given stock is set by the daily push and pull of investors, some who whom want to buy and some of whom seek to sell.
While an investor owns the stock, he or she might collect cash payments known as dividends just for being an investor in the firm.
Stock ownership used to be the province of only a wealthy few and it was hard to do. Buying stock required the help of a licensed stock broker, and shares were expense to buy and sell.
Because of the cost, really only big institutions such as banks, insurance companies and private wealth managers were regular buyers. Over time, though, demand grew and now small investors buy and sell stock regularly.
Investment mutual funds have become another big customer for stocks. These funds buy and sell different company shares based on the collective interest of fund investors. More than anything, the move toward mutual funds by investors large and small drove demand for stock.
Understandably, demand has caused the cost of stock investing to fall dramatically. Buying shares once cost an investor upward of $100 per transaction. Now you can trade for a little as $5 and many stock index funds are virtually cost-free.
Over long periods of time, stocks offer investors a great bang for the buck, outpacing inflation handily. Investors who choose to reinvest dividends, rather than taking the cash as income, get the added benefit of increasing their investment automatically with no effort.
One reason that stocks have done so well is that publicly traded corporations must work to grow earnings in excess of inflation or risk going out of business.
The strong urge among corporate managers to make productive and profitable choices with the capital they control causes demand for shares to increase as well.
Investors add those increases, known as capital appreciation, to the gains from dividend payments to calculate total return.
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