Stocks (also called company shares or equities) are a vital part of many investors’ plans to build wealth. However, their complex nature and volatile price movements can make them intimidating to beginners. Here are a few facts about stocks that can help put them into perspective and give you the confidence to start investing.
What is a stock?
A share of stock represents a fractional ownership in a company. When a business is publicly traded, that means it can be bought and sold on a market, like the New York Stock Exchange or Nasdaq. When someone buys or sells a share, it affects the value of every other share in that same company. When a company does well, it can grow to the point that its stocks are worth more than what they cost to buy. This is known as capital appreciation, and investors who stick with them over a long period of time are usually rewarded for their patience with strong returns.
When a company is looking to raise money for things like designing new products, hiring employees or expanding into a new market, it can issue stock in order to attract investment. Those shares then become available to the public on a stock exchange or in private markets, and their prices are determined by supply and demand. When there is high investor demand for a particular stock, the price will rise. Conversely, when investors turn sour on a company or the prospects for its growth are bleak, the stock’s price will fall.
Companies can also pay out a portion of their profits to shareholders in the form of dividend payments. These can be paid in cash or additional shares, and they can serve as a source of tax-efficient income for investors. Investors also benefit from the fact that stocks can be more easily turned into cash than other assets, such as real estate or jewellery.
Most individual investors own common stock, which comes with voting rights and proportional ownership in the company. Preferred stock doesn’t come with voting rights, but it does have the advantage of being paid before common shareholders in the event that a company needs to liquidate its assets in order to repay investors.
A stock can be bought and sold on the stock market, or through private sales to friends and family members. Another option is to invest in a mutual fund or an exchange-traded fund (ETF). These funds automatically diversify your portfolio by buying and selling a wide range of stocks. This makes them a great choice for beginner investors who don’t want to spend the time researching individual companies or hand-picking their own shares. But whatever route you take, make sure to start slowly and only with a long-term horizon in mind. This will help you stay patient during times of market volatility and ensure that you’re in it for the long haul. For more information about how stocks can play a role in your financial plan, talk to an advisor.
