When you invest in stocks, you become part owner of a company. As the company grows, the value of your stock may increase. But, as with any investment, it’s possible to lose money in the market. That’s why many investors diversify their portfolio with stocks.
When companies raise capital to help fund operations, they often sell shares of their company. Investors buy and sell these shares for a variety of reasons. They may want to participate in the growth of the company, earn a higher return on their investment than what they could receive from other assets, such as bonds, or diversify their overall portfolio.
The term “stock” is also used to refer to the share of a company that you own, and you may hear the term used in conjunction with mutual funds or Exchange-Traded Funds (ETFs). But most people when they talk about stocks are talking about common stock—shares of publicly traded companies—that allow you to take part in the success of the company.
As with other assets, you can make money on stocks in two ways: price appreciation and dividends. When the price of a stock rises after you purchase it, that’s called a capital gain. It’s similar to how the value of your home increases over time, but on a much larger scale.
Stocks are a key component of any long-term investment plan, but it’s important to remember that stock prices can fluctuate over shorter periods of time, based on more than just how well or poorly the company is doing. Economic trends, other factors in the markets and even investor sentiment can impact a stock’s price.
To earn a return on their investments, many investors look for stocks that pay dividends. Companies issue dividends to shareholders when they have extra profits, and you can receive this income as a portion of your ownership stake in the company. It’s important to note that not all companies offer dividends, and that the amount of income you’ll receive will depend on whether you own common or preferred stocks.
You can purchase individual stocks or invest in a broad group of stocks through mutual funds, ETFs and index funds, which are pre-arranged “baskets” of stocks that can provide you with diversification without having to choose specific individual securities. The easiest way to buy and sell stocks is by opening a brokerage account with an investment firm. This process involves providing a variety of personal information and indicating how much risk you’re willing to accept with your investments.