Price Appreciation
If the market value of a stock increases after an investor buys it, selling the shares at a higher price can result in a capital gain, before applicable taxes and transaction costs.
INVESTING • STOCK MARKET
Stocks Explained Understand Ownership, Risk & Potential Returns
Learn how stocks work, how investors can potentially earn returns, what moves share prices, and the key risks to understand before making investment decisions.
01
Ownership
02
Returns
03
Risk
STOCK MARKET BASICS
What exactly is a stock?
A stock represents an ownership interest in a company. Businesses can issue shares to raise capital, while investors can purchase those shares through financial markets.
When you own shares of a company, you generally own a small portion of that business. The value of your investment can rise or fall as the market changes its expectations about the company and the broader economy.
Stocks can provide opportunities for long-term wealth building, but they also involve investment risk. Understanding what you own, why you own it and how much risk you can reasonably accept is an important foundation for investing.
01
A share is an ownership interest.
The percentage represented by one share depends on the company's total shares outstanding.
HOW IT WORKS
From business capital to market value.
The basic stock-investing process becomes easier to understand when you look at it as a sequence of ownership, trading and valuation.
01
Companies Raise Capital
A company may issue shares to raise money for operations, expansion, acquisitions or other business purposes.
02
Investors Buy Shares
Investors can purchase and sell shares through brokerage accounts and financial markets.
03
Prices Change
Supply, demand, company performance and investor expectations can cause share prices to move.
OWNERSHIP
Buying a stock means owning part of a business.
Stocks are sometimes viewed only as numbers that move up and down on a trading screen. But underneath the price movement is a real business with customers, employees, assets, competitors and financial results.
Investors therefore have an opportunity to participate in the economic performance of companies they own. However, ownership also means exposure to the company's business risks.
Ownership
Shares represent an interest in the company.
Value
The market continuously reassesses what shares are worth.
Risk
The investment can lose value as well as gain value.
POTENTIAL RETURNS
How can investors potentially earn?
Stock investments can potentially generate returns through changes in share prices and, for some companies, dividend distributions.
Dividends
Some companies distribute part of their available earnings or cash to shareholders through dividends. Dividend payments are not guaranteed and can change over time.
$
Not every publicly traded company pays dividends.
MARKET MOVEMENT
What makes stock prices move?
Stock prices reflect changing expectations. Several company, economic and market factors can influence investor demand.
01
Company Earnings
Revenue, profitability, cash flow and earnings expectations can influence how investors value a business.
02
Growth Expectations
Investors may value companies differently depending on their expectations for future growth.
03
Interest Rates
Interest-rate changes can influence borrowing costs, economic activity and investment valuations.
04
Economic Conditions
Inflation, employment, consumer demand and economic growth can affect companies and financial markets.
05
Investor Sentiment
Confidence, uncertainty and changing expectations can affect the balance between buyers and sellers.
COMPANY SIZE
Understanding market capitalization.
Market capitalization is commonly used to describe the market value of a publicly traded company's outstanding shares.
It is generally calculated by multiplying the current share price by the number of shares outstanding. Investors often use market capitalization when comparing companies and understanding their relative size.
Share Price
×
Shares Outstanding
=
Market Cap
MARKET
CAP
Large-cap
Mid-cap
Small-cap
RISK & VOLATILITY
Stocks can offer growth, but risk comes with it.
Stock prices can decline substantially. Understanding risk is just as important as understanding potential returns.
Learn Investment Fundamentals →01
Market Volatility
Prices can move sharply during periods of uncertainty or changing market expectations.
02
Company Risk
Weak earnings, competition, management issues or other company-specific events can affect shares.
03
Concentration Risk
Holding too much of one company or sector can increase the effect of a negative event.
04
Valuation Risk
Even a strong company can be an unsuitable investment at an unreasonable valuation.
DIVERSIFICATION
Why investors often spread their exposure.
Diversification means spreading investments across different companies, sectors, asset classes or markets. Its purpose is to reduce the impact that one investment can have on the overall portfolio.
Diversification does not eliminate market risk or guarantee a profit, but it can help reduce concentration risk when used as part of a broader investment strategy.
Company A
Company B
Company C
Other Holdings
A portfolio can be structured to avoid relying heavily on a single
company or market segment.
FOR BEGINNERS
Four questions to ask before buying a stock.
Looking beyond a stock's recent price can help investors build a more complete view of the underlying business.
What does the company do?
Understand its products, services, customers and competitive position.
How does it make money?
Examine its revenue sources, business model and profitability.
What could go wrong?
Consider competition, debt, regulation and other material risks.
What is the valuation?
A quality business and a reasonable stock valuation are separate things to evaluate.
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FREQUENTLY ASKED QUESTIONS
Stocks explained in simple terms.
A stock represents an ownership interest in a company. Investors who purchase shares generally own a small portion of that business.
Investors may potentially earn returns through stock price appreciation or dividends when a company pays them. Neither outcome is guaranteed.
Yes. Stock prices fluctuate and can decline. The amount of risk depends on the individual investment, market conditions and an investor's overall portfolio.
Dividends are distributions that some companies make to eligible shareholders. Companies can change, reduce or stop dividend payments.
Market capitalization is generally calculated by multiplying the current share price by the number of outstanding shares. It is commonly used to compare the relative market value of publicly traded companies.
Yes. A stock can lose value, and an investor can lose part or all of the money invested. Past performance does not guarantee future results.
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