What are stocks and how do they work?

What are stocks?

Stocks are units of ownership in one or more companies. In other words, each stock represents a small piece of a company's overall value. Although the terms 'stocks' and 'shares' are often used interchangeably, 'stocks' typically refer to ownership in multiple companies, while 'shares' usually indicate ownership in a specific company. 

Stocks have been around for centuries, evolving from early trading practices where merchants invested in ventures. Today, stocks play a crucial role in personal finance, often helping investors grow their wealth and achieve financial goals like funding retirement or children's education.

Companies sell shares to raise funds, helping them expand operations, launch new products or enhance existing services. This process takes place in the stock market, where buyers and sellers trade shares. Popular companies like Apple, Amazon and Microsoft issue stock to fuel growth and innovation.

When you buy stocks, you become a shareholder. For example, if you buy shares in Apple, you become part-owner of the company, with a small stake in its overall success. Your stock value will rise or fall based on the company's performance and market confidence.

How to buy stocks

As a shareholder, you might also have voting rights on important company decisions (think mergers or board elections) and potentially receive dividends – regular payouts from the company’s profits. Not all companies pay dividends, however; some growth-focused companies reinvest earnings back into the business to fuel future growth.

How do stocks work?

1. Listing on an exchange

First, companies issue public stocks through a process called an Initial Public Offering (IPO). An IPO is when a company goes public, offering shares to investors for the first time. Once shares are issued, investors can buy and sell them on stock exchanges, such as the New York Stock Exchange (NYSE).

2. Stock price changes

Stock prices continuously change due to supply and demand, influenced by factors like company performance, economic conditions, industry trends and overall market sentiment. Positive company news or strong financial results typically boost stock prices, while negative developments cause them to decline. For example, strong quarterly earnings can drive Tesla stock up, while Musk controversies generally push prices down.

3. Making money from stocks

Investors primarily earn returns in two ways: stock price appreciation (when the value increases) and dividends. Price appreciation enables shareholders to sell their shares at a profit. If you sell the shares for less than what you paid inclusive of fees and other costs, you’ll take a loss.

Types of stocks

Stocks are categorized based on their features and investment purposes:

• Common stocks: Offer voting rights and potential dividends. They carry higher potential rewards but also greater risks. Most stocks investors buy are common stocks.
• Preferred stocks: Usually pay fixed dividends with priority over common stocks but typically offer no voting rights. Preferred stocks appeal to investors seeking steady income with lower volatility.
• Growth stocks: Represent companies expected to grow faster than average, often reinvesting profits rather than paying dividends. Examples include tech companies like Amazon and Netflix, which focus heavily on growth and expansion.
• Value stocks: Stocks perceived as undervalued by the market, typically providing consistent dividends. Investors who seek undervalued companies with strong fundamentals often prefer value stocks.
• Blue-chip stocks: Stocks of large, stable companies known for reliability and steady earnings. These stocks are popular among conservative investors looking for stability and regular dividends.
• Dividend stocks: Stocks from companies known to regularly distribute profits to shareholders. Investors often include dividend stocks in their portfolios to generate regular income and stability during market fluctuations.

Why do people invest in stocks?

People invest in stocks with the aim to build wealth, generate income and protect against inflation, to name a few:

1. Building wealth

Historically, stocks have delivered stronger long-term returns than most other asset classes. This makes them a popular option for those who want to grow their wealth over time. Thanks to the power of compounding, even small, regular investments in stocks could potentially accumulate substantial value over decades.

2. Regular income

Many companies pay dividends – cash payouts to shareholders from their profits. These payments can sometimes provide a reliable income stream, especially valuable for retirees or those looking to supplement their monthly earnings. Dividend reinvestment can also help accelerate portfolio growth.

3. Inflation hedge

Stocks tend to rise in value over time, often outpacing inflation. While inflation erodes purchasing power, the growth of strong companies – especially those that can raise prices – helps investors stay ahead of the curve. So, holding stocks could help preserve the real value of your money.

 4. Diversification

Adding stocks to a portfolio introduces exposure to different companies, industries and regions. This diversification helps spread risk and can reduce the impact of poor performance from any one investment. Stocks can be paired with other asset types to create a balanced, resilient portfolio.

Benefits and risks of investing in stocks

Investing in stocks comes with potential rewards and associated risks:

Benefits of investing in shares

High growth potential

Stocks have historically outperformed many other asset classes, especially over the long term. For investors willing to ride out market ups and downs, this growth potential can translate into meaningful financial gains.

Easy to buy and sell, providing liquidity

Stocks can be bought and sold quickly through Crypto.com, making it one of the most accessible investment options. This liquidity means you can react to market changes or access funds relatively easily.

Possible dividend income

Many companies reward shareholders with dividends – a portion of profits paid out regularly. This could provide a steady income stream, particularly valuable for those in retirement or seeking passive income.

Risks of investing in shares

Volatility leading to frequent price changes
Stock prices can rise or fall sharply in response to news, earnings reports or market sentiment. This volatility can be unsettling, especially for short-term investors.

Potential for financial losses if companies underperform
Not all companies succeed. If a company performs poorly or fails altogether, its stock price may drop significantly – and investors could lose part or all of their investment.

Economic uncertainties affecting stock performance
Broader economic factors like inflation, interest rate hikes or geopolitical tensions can negatively impact the stock market. These events often create ripple effects across sectors and regions.

You can manage these risks through diversification, long-term investing and thorough market research.

How to start investing in stocks

To start investing in stocks, follow these clear steps:

1. Open a brokerage account
2. Research stocks
3. Employ smart investment strategies
4. Regularly monitor your investments

 1. Open a brokerage account

Choose a platform that offers intuitive tools, low fees, educational resources and strong customer support. The Crypto.com App provides a seamless experience with mobile access, allowing you to trade, track and manage your investments from anywhere. Enjoy commission-free trading on thousands of stocks and ETFs, with no added spread. Our user-friendly interface caters to both beginners and experienced investors. 

When you sign up, you’ll unlock the Rewards Box – pick a stock from the top 10 S&P 500 companies and receive a reward ranging from $5 to $300. Plus, get a transfer bonus of up to 3% when you move assets from another brokerage. You can also explore Whale Baskets to follow the portfolios of influential figures like Jensen Huang, Warren Buffett and Nancy Pelosi. Manage your entire portfolio – stocks and ETFs – in one app.

Download the Crypto.com App or sign up for an account online

 2. Research stocks

Start by understanding what a company does and how it earns revenue. Look into its financial performance, leadership team, industry position and future outlook. Tools like earnings reports, analyst ratings and sector comparisons can help you make more informed decisions. Don't rush – take the time to compare a few options. With Crypto.com, you get access to over 10,000 popular US stocks and ETFs – all with zero commissions.

Explore our Stocks Learn Hub

 3. Employ smart investment strategies

Begin with simple, proven strategies such as dollar-cost averaging – investing a fixed amount on a set schedule regardless of market conditions. This helps smooth out volatility over time. You can also consider thematic investing or index funds if you're not ready to pick individual stocks. 

Start investing

 4. Regularly monitor your investments

Track how your stocks are performing against your goals. Use the Crypto.com App’s dashboard and tools to monitor your portfolio in real time. Avoid reacting emotionally to short-term market swings, but do revisit your asset allocation regularly and rebalance when needed.

Smart investing is a journey. Start today, stay consistent and let time work in your favor.

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FCUL is a subsidiary of Crypto.com. FCUL is a separate entity from Crypto.com, Foris DAX, Inc. and other affiliated Foris companies. FCUL does not engage in the sale, transfer or custody of crypto currencies or digital assets. Crypto.com is a separate entity from FCUL and does not engage in the securities business. Customer balances and crypto holdings held and transacted at Crypto.com and other entities outside of FCUL are not covered by SIPC insurance and are separate from securities transactions and holdings at FCUL.

All investments involve risk and not all risks are suitable for every investor. The value of securities may fluctuate and as a result, clients may lose more than their original investment. The past performance of a security or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit or protect against loss in a down market. There is always the potential of losing money when you invest in securities or other financial products. Investors should consider their investment objectives and risks carefully before investing.

​​This is informational content sponsored by Crypto.com and should not be considered as investment advice.