Investing in stocks can be an important part of your financial strategy. It’s also a way to help support the economy. For example, tax cuts can increase consumer confidence and boost stock prices. On the other hand, high unemployment may cause stock prices to fall.
Companies raise capital by selling parts of their business to investors. The oldest way of doing this is by offering shares in an initial public offering (IPO), but newer methods include private placements, debt offerings, and other ways that a company can sell pieces of itself. Investors trade these securities in the secondary market, either on exchanges or over the counter. More than 58,000 companies are publicly traded today.
Investors can be individuals, such as 401(k) owners, or institutions, including pension funds, insurers, mutual fund companies, exchange-traded funds, and hedge funds. Companies themselves can also be direct participants in the market by trading their own shares. Others use derivatives and other instruments to indirectly participate in the market.
Investors often look at market indexes like the Dow Jones Industrial Average or S&P 500 to get a sense of how the market is performing overall, or in specific sectors. They can also track the performance of individual stocks, such as Apple or Tesla, using their investment account. In general, stocks rise or fall in price based on supply and demand, with supply outweighing demand when the market is optimistic or negative about a company’s future. This dynamic process, known as “price discovery,” helps to allocate resources in an efficient way and promotes economic growth.