A stock is a unit of ownership in a company. Literally thousands of stocks trade on the public market, making it possible for just about anyone with a little money to become a part owner in a business. In the long term, this type of investment has been shown to offer a better return than other options such as savings accounts and bonds.
However, just because stocks have historically been a solid choice for investors doesn’t mean that there aren’t risks involved. As with any type of investing, it’s important to fully understand the process before jumping in headfirst. Read on to learn what stocks are, how they work and how you can get started buying them.
Stocks are pieces of ownership in a publicly traded company, and depending on the type of stock, may also come with voting rights or other benefits. They’re the backbone of many investors’ portfolios, and are a key ingredient in building wealth over time. Whether you’re just getting started or you’re an experienced investor, understanding how stocks work is vital for successful trading.
Buying stocks isn’t exactly rocket science, but there are some terms you should be familiar with before you start purchasing them. Some of the most common include bid, ask and day range. These are the prices that buyers and sellers are willing to pay or receive for a share of stock at any given time. A stock’s price fluctuates throughout the day based on a number of different factors, including current economic events and market volatility.
When you invest in a stock, your goal is to see its value rise while you own it. This can happen for a number of reasons, but one big reason is that companies grow and become more profitable. This growth can lead to higher stock prices, which allows you to sell your shares at a profit. In addition, some companies choose to give out a portion of their profits to shareholders, which is known as a dividend.
While the idea of seeing your investments grow is a great incentive, it’s crucial to remember that not all stocks are created equal. Some types of stock have lower volatility than others, and can help you build a more stable portfolio. These include utility stocks, consumer staples and healthcare stocks. These are often considered “defensive sectors,” meaning that they’re more likely to rise in value during economic turmoil.
Another benefit of investing in stocks is that you have limited liability as a shareholder. This means that, unlike other forms of partnership, you can’t be held liable for the company’s debts in the event of bankruptcy. This is an important safeguard for newer investors, as it makes the possibility of losing your initial investment much less daunting. It’s still important to do your homework and research, but this added layer of protection can be a huge benefit for those who are just starting out. Having an emergency fund can be a great addition to your portfolio, and ensures that you don’t have to liquidate your assets if the stock market declines.
