Purchasing stocks is like purchasing ownership in a company, with each share of stock representing a tiny piece of ownership. The more shares you own, the more of the company you own.
There are two primary classes of stock. The one you choose depends on what you want from a stock. Preferred stock typically pays regular dividends and is favored by investors who want income foremost from their stocks. Common stock represents ownership of a company and may offer more rights and privileges, such as voting, than preferred stock, but not necessarily payment of dividends.
Investors may purchase stock on the primary or secondary market. A company sells its stock to the public on the primary market through its initial public offering. Investors may then sell their shares through brokers to other investors on the secondary market, such as NASDAQ.
Basically, businesses issue stock to raise money. They use this money to finance expansion, pay for equipment, and fund projects. Corporations issue stock when they may need additional capital to operate successfully.
When companies make profits, they may reward their stockholders with pieces of their profits, known as dividends. Dividends are an incentive for investors to hold stocks. Beyond the dividend, stock may also increase in value over time if the company increases its market share and increases its profit. When companies perform better than expected, or at least better than similar companies, investors reward the company by purchasing more stock in that company. This demand increases the value of the stock, thereby increasing the value of the stock that you own in that company. Likewise, if demand for the company stock decreases, meaning that more people want to sell their shares than buy new shares, the company stock decreases in value.