What Is a Stock?
A stock, also known as a share or equity, represents ownership in a company. When you purchase a stock, you’re buying a small portion of that company, entitling you to a piece of its profits and assets. Stocks are issued by companies to raise capital and traded on exchanges where prices fluctuate based on supply and demand.
Stocks can be common or preferred. Common stocks often come with voting rights and the potential for dividends, while preferred stocks typically offer fixed dividends but limited voting rights. Owning stock can be a powerful way to build wealth over time as companies grow and succeed.
How the stock market works
The stock market is a platform where investors buy and sell shares of publicly listed companies. Major exchanges like the Nigeria Stock Exchange (NGX), New York Stock Exchange (NYSE) or National Association of Securities Dealers Automated Quotations (NASDAQ) serve as centralized hubs for these transactions. When investors are confident in a company’s future, demand for its shares rises, pushing the price up. If confidence falters, prices fall.
Brokers act as intermediaries between buyers and sellers, while clearinghouses such as the Central Security Clearing System (CSCS) handle the settlement of trades. The market operates during set hours and is regulated to ensure transparency and fairness. Stock prices are influenced by corporate earnings, global events, interest rates, and investor sentiment.
Why people invest in stocks
People invest in stocks for a variety of reasons:
- Capital appreciation: Over time, well-performing stocks can increase significantly in value.
- Dividend income: Many companies pay out a portion of profits to shareholders as dividends.
- Liquidity: Stocks can be bought or sold quickly during market hours.
- Ownership: Shareholders gain partial ownership in companies, and may vote on key decisions.
Historically, stocks have offered one of the highest potential returns of all asset classes, making them a core component in many investment portfolios.
Market hours and order types
The stock market typically operates during weekday hours, from 10.30 AM to 2.30 PM WAT in Nigeria, and 9:30 AM to 4:00 PM EST in the U.S. However, some brokers offer pre-market and after-hours trading.
Common order types include:
- Market Order: Buys/sells immediately at the current price. Use market order if you want the trade executed immediately irrespective of the price.
- Limit Order: Executes only at a specified price or better. Limit order works if you can afford the cost of not executing the order immediately, i.e. the risk that the price of the stock ends up higher.
- Stop-Loss Order: Automatically sells if a stock drops to a specific price.
- Stop-Limit Order: Combines stop-loss and limit criteria for greater control.
Understanding these orders helps you manage risk and take advantage of price movements.
Risks & rewards of investing in stocks
Stock investing offers high reward potential but comes with risk:
Rewards:
- High long-term growth potential
- Passive income through dividends
- Easy to access and liquid
Risks:
- Market volatility
- Company-specific failures
- Emotional decision-making during downturns
Diversification, research, and long-term perspective are key to managing stock market risk effectively.
Investing styles and strategies
Value vs. Growth investing
- Value investing focuses on finding stocks that are undervalued by the market. These stocks often have solid fundamentals but trade at lower prices relative to earnings or book value.
- Growth investing targets companies expected to grow at an above-average rate. These stocks may be priced higher but are bought for their future potential.
Which to choose? It depends on your risk tolerance and time horizon. Value stocks may offer more stability; growth stocks may deliver higher returns but with greater volatility.
Large caps vs. small caps (and penny stocks)
- Large-cap stocks are from established companies with market values over $10 billion. They’re generally more stable.
- Small-cap stocks represent smaller firms that may offer higher growth potential—but also carry more risk.
- Penny stocks trade at low prices (under $5), are highly speculative, and often illiquid. They are best suited for experienced, risk-tolerant investors.
Should you invest in individual stocks vs. ETFs?
- Individual stocks give you control and the potential for big gains—but they also carry concentrated risk.
- ETFs (Exchange-Traded Funds) offer instant diversification across many stocks or sectors and usually have lower costs. ETFs are great for beginners and passive investors.