Stocks, or shares of a company, are an essential part of many people’s investment portfolios. They offer the potential to grow wealth and achieve financial goals like retirement, but they also come with risks. Understanding what a stock is and how different types differ can help you make the right decisions for your investment needs.
A share of stock is a partial ownership stake in a company. Depending on the type of stock, it may also give shareholders the right to vote in shareholder meetings and receive dividends when they’re distributed. A company’s value rises and falls based on its performance, economic conditions and other factors. Stock prices are quoted throughout the trading day and can change dramatically in just one session. This volatility is one of the reasons why many investors build a diversified portfolio.
Investing in stocks can provide significant returns, especially over the long term. The average return on the S&P 500, a collection of around 500 of the largest companies in the country, is about 8% per year. This is significantly higher than the 2% you can earn in the highest-yield savings account.
However, the stock market is volatile and can be very risky for investors. Stock prices can dip drastically due to a number of factors, including global economic events or news about a particular company. As a result, you must carefully assess your risk tolerance before investing in stocks.
There are a few ways to invest in stocks, including individual stocks and mutual funds. If you choose to invest in individual stocks, it can take a lot of research and work to build a diversified portfolio. Most people who invest in stocks do so through a retirement account such as a 401(k), which holds a large number of company stocks in one pool.
Another way to invest in stocks is through an exchange-traded fund (ETF). An ETF is a collection of multiple individual securities that track a specific index or sector. These funds can be a great way for beginners to invest in the stock market because they eliminate much of the work of researching and buying individual stocks.
The main reason people invest in stocks is the potential to grow their money. Over the long term, stocks have historically provided better returns than cash investments, such as those in a bank certificate of deposit (CD) or a savings account. However, stocks can be volatile and can drop in price in a matter of hours, causing investors to lose money. The key to success with stocks is diversifying your portfolio, limiting your exposure and keeping your expectations realistic.
