Investment Basics: How do Stocks Work

If the state of the stock market is a common topic in the
daily news especially in hard economic times, but for those
without a background in personal finance or business,
financial discussions may sound more like a foreign
language than relevant news stories. Forming an
understanding of what stocks are and why people buy them is
an essential aspect of financial education In the modern
economy.

What are Stocks?

A share of stock is a small fraction of ownership in a
company. As businesses grow, they often need large sums of
money to undertake new projects and to fund expansion. One
way businesses can raise money to fund expansion is by
selling shares of stock to investors. Investors buy stock
in companies because the value of stock can increase over
time depending on demand for the stock. When demand for a
certain company’s stock goes up, the price of the stock
rises aid when demand goes down, stock prices fall. Demand
for stock typically follows the performance of the company:
when companies have strong sales and profit the value of
their stock tends to rise. If an investor buys stock in a
company and the value of the stock increases over time, he
can sell the stock for a profit. Profits gained from
selling stocks and other assets are known as capital
gains.


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