Stocks rule: What they are and how they make money Stocks rule: What they are and how they make money Stocks rule: What they are and how they make money

Stocks rule: What they are and how they make money


Before you start investing, understand how stocks work.

What is a share of stock?

A stock is a piece of a company. Even if you own just one share of stock, you are a shareholder and you own part of that company. 

Of all investment types, stocks carry some of the best potential for long-term returns. Since Nasdaq's inception in 1971, stocks have returned more than 10 percent annually, on average. The chart below compares that return to bonds over that period, as well as the current earnings on high-yield bank savings accounts. 

The bad news? Stocks are also riskier than other investments, which means investors can lose money, especially in the short term. 

A stock's value is always changing

There are many reasons why a stock's value can go up and down. For starters, company performance. When a business is successful, the value of its stock typically rises. 

But another factor affecting a stock's value is supply and demand. 

When more investors like a company, demand drives the price of its shares up. On the other hand, when more shareholders want to sell, the price falls. This is the law of supply and demand in action.  

Sometimes demand is rational. For example, a company could invent a faster and cheaper way to stream video, or a top stock analyst might recommend the company. The demand of this stock would then likely increase. Conversely, demand for a stock could drop if the company reveals unexpectedly low earnings in their quarterly report. 

Supply can change when a company buys back some of its own stock, or splits the stock. Analysts also look at inflows and outflows, which refers to how much money confident investors are pouring into a company by buying stock—or whether frightened investors are selling. 

Of particular interest for analysts are something known as 13F filings, which are reports filed by institutional investors (think hedge funds) with at least $100 million with equity assets under management. Stocks can drop when institutional investors are reporting having sold their holdings in that company (for example, if a major hedge fund reports that they sold all of their shares in General Electric, that could have an impact on the stock's price). 

But sometimes investor sentiment is based on intangibles, like fear. If there's bad news for an industry—say, an industrial oil spill at sea, threats of a trade war or other geopolitical events—the stocks of even slightly related companies might take a hit. 

In the worst case, intangibles can lead to a herd mentality that transcends logic. As economist John Maynard Keynes once said, "The market can remain irrational longer than you can remain solvent." When you add in the rise of algorithmic trading, in which huge blocks of shares trade within nanoseconds, you can see how even small market shifts can quickly turn into major events. 

What are dividends?

While there is risk involved, the ultimate goal of investing is to make money. When you invest in stocks, your profits typically come in two forms: 

  1. You get cash dividends. A company can choose to pay shareholders some or all of its profits through dividends. You can take your cash and buy new sneakers, or you can reinvest your dividends by buying more shares. This may not sound as fun as new sneakers, but over time you could buy a house with a walk-in shoe closet. 

  2. Share prices go up. Lots of companies don't pay dividends, but shareholders' money can still grow exponentially if the value of the stock rises. 

Of course, there's no guarantee that the stock price will rise or the company will offer dividends. Just as the fine print always says, past performance is not indicative of future results.

How to buy a group of stocks at once

Obviously, you know by now that it's possible to buy stock in an individual company. But if you're new to investing, it might be smarter to invest in mutual funds or exchange-traded funds (ETFs). These both allow you to invest in multiple companies, and even across multiple types of businesses, at once. When you invest this way, you can be less concerned about the performance of an individual company, because you're less exposed to its ups and downs. 

You may already be an investor without realizing it. If you participate in a workplace retirement plan such as a 401(k), your cash is probably invested in a mutual fund or ETF.

No matter which route you choose to take when investing in stocks, they can play an important role in a well-rounded portfolio. 

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992