This video is part of a series of videos on different asset classes, and explains the basics of stocks. Topics covered include stock valuation and the difference between public and private companies.
A stock holding represents ownership in a company. As a stockholder, you are entitled to a share of the company’s profits. Some companies pay out these profits in dividends, while others reinvest the money in their firm to increase profits in the future. Either way, stock prices tend to increase as companies improve their profitability.
Over the long run, stocks have outperformed every other asset class. With time, the returns from even a small initial investment can grow into a substantial sum. But in the short run, stocks can be highly volatile, swinging on a daily basis based on earnings predictions, management shakeups, and rumors of a merger or acquisition. Valuation in the short run is far from clear. Because of this, it is important to think of stocks as a long-term investment.