What are stocks and how do they work?
Guide Summary
- Ownership & Growth – Buying a stock means owning a piece of a company, with the potential to earn returns from rising share prices and dividends.
- How They Work – Stocks are traded on public markets, with prices driven by supply, demand, performance, and wider market factors.
- Risk & Reward – Stocks can be volatile, but with diversification and long-term thinking, they’re a powerful way to build wealth.
How do stocks work?
Companies issue shares to raise money often through an initial public offering (IPO), which allows them to sell ownership stakes to investors. Once listed on a stock exchange, these shares can be bought and sold by the public.
The price of a share is driven by supply and demand — if more people want to buy a stock than sell it, the price goes up, and vice versa. Market value (or market cap) is the share price multiplied by the total number of shares.
Prices change based on company performance, news, investor sentiment, and broader economic factors.
Why invest in stocks?
Investing in stocks gives you the chance to grow your money if a company's value increases over time. Some stocks also pay dividends, a portion of company profits shared with shareholders, potentially providing regular income.
Over the long term, stocks have historically outperformed cash savings and helped investors build wealth. While short-term ups and downs are normal, staying invested can pay off.
How do stocks make you money?
As mentioned above, investors can potentially make money from stocks in two ways:
- Capital appreciation - this means the price of your stock has increased. When your appreciated money is invested in a stock, you won’t make a profit until you ‘realise’ your gains by selling it.
- Dividends - this is a share of a company’s profit, paid out to you in cash. Not all stocks offer dividends, and payouts are at the discretion of the company.
Types of stock explained
- Growth stocks aim for rapid expansion and often reinvest profits, so they may not pay dividends.
- Value stocks are seen as undervalued by the market and could offer higher potential growth.
- Dividend stocks regularly share profits with investors, providing income alongside potential growth.
- Blue-chip stocks are large, established companies known for stability
- Penny stocks are low-priced and higher risk, often tied to smaller or newer businesses.
Each type comes with its own balance of risk and reward — so it’s worth matching your picks to your goals and comfort level.
Risks of investing in stocks
Stock prices can rise and fall quickly due to market volatility, meaning there’s always a risk of losing money. Emotional investing — like panic selling during downturns — can lock in losses and hurt long-term returns.
It’s important to understand your risk tolerance and avoid reacting to short-term market noise. Diversifying your investments and staying focused on long-term goals can help manage risk. A steady mindset is just as valuable as a strong portfolio.
Stocks summary
Stocks let you buy a slice of a company, with the potential to earn through rising prices and dividends — though prices move up and down. They’re a powerful tool for long-term growth, especially when you stay diversified and think long-term.
Next, we’ll explore investment bonds — typically a steadier asset than stocks that can offer regular income and help balance risk in your portfolio.
FAQs
Is investing in stocks worth it?
Yes — for many people, investing in stocks is one of the most effective ways to grow wealth over time. While there are risks, stocks have historically outperformed cash savings and inflation, especially over a long-term investment horizon.
Do all stocks pay dividends?
No — not all stocks pay dividends. Some companies reinvest their profits to fuel growth instead. These are often called growth stocks, while dividend-paying stocks provide income alongside potential capital gains.
Which stock is best for beginners?
There’s no one-size-fits-all answer, but beginners often start with well-known, stable companies (blue-chip stocks) or consider index funds and ETFs, which spread your money across many stocks to lower risk.
When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than your original investment. Chip does not offer financial advice and this should not be considered as a personal recommendation. Diversifying means spreading your investments across different sectors, countries and asset classes.
Direct investment into individual stocks is not available via the Chip platform. Chip offers investment funds that invest in different assets as a collective investment.
