A stock represents fractional ownership in a company. When you buy shares of a publicly-traded business, your return on investment is dependent on the company’s success and whether its value goes up while you own it.
Aside from providing the potential for capital appreciation, stocks also pay out dividends to shareholders. The level and timing of those dividends are determined by the business’s management and may vary. Stocks are a key component in many investment portfolios and are the primary form of publicly-traded equity in most modern economies.
You can purchase stocks in a variety of ways, including through your employer’s 401(k) plan and many no-commission online brokers. If you’re thinking of investing, be sure to consider your personal financial situation and the risk/reward trade-offs. You should never put your entire savings at risk for the sake of stock investment, so don’t invest until you have paid down high-interest debt and have emergency funds set aside.
In general, stocks are more likely to increase in value over the long term than bonds and cash investments. However, over shorter periods of time (weeks and months), the price of a stock can fluctuate based on factors that have little to do with the actual performance of the company.
Investing in stocks is complex, but the basics are relatively straightforward. When choosing individual stocks, you should look at the business model and fundamentals of the company in question to ensure it has a sustainable profit margin and positive net income over a period of at least four years. This can be done with a basic screener that includes profitability and other key factors in addition to the company’s ticker symbol (a one- to four-letter mnemonic assigned to each company).
Investors are rewarded for their patience by the chance to share in a company’s successes, although they must also assume the possibility of significant losses. Depending on the type of company in which they invest, they can also gain voting rights over important governance matters.
For this reason, careful investors tend to maintain a well-diversified portfolio with stocks that are distributed across different industries and geographic regions to reduce the likelihood of an investment collapse. The benefits of diversification have been shown to enhance long-term returns and reduce near-term risk. If you’re ready to take the plunge, we recommend researching no-commission online brokers and robo-advisors to find the best options for your goals.
