Stocks are one of the core tools many investors use to grow their savings and plan for long-term financial goals like retirement or educational expenses. But they’re not without risk, because stock prices can fall as easily as they rise. And if you sell your shares for less than you paid for them, you’ll lose money.
When you buy a share of stock, you become a partial owner of the company that issues it. That means you’ll make money if the company does well and sells for more than what you paid for it, or if the company pays dividends to shareholders. Many stocks are part of a large publicly traded corporation and trade on a stock exchange like the Nasdaq or New York Stock Exchange (NYSE). But you can also find a private company to invest in, such as a startup.
Companies issue stock to raise money, which they can then use for things like paying off debt or launching new products. They’ll then sell those stocks to individuals who want to invest in them, usually through a brokerage firm. Companies that don’t need to raise money often don’t issue stock, though they can still hold it as a reserve to pay out to owners in the event of a company failure or lawsuit settlement.
Investors buy stocks for a number of reasons, including the potential to earn a higher return than what they would get in a bank account or to outpace inflation. Historically, stocks have returned 10% a year on average.
In order to try to maximize those returns, investors seek to diversify their portfolios by investing in a variety of stocks in different companies and industries. This helps to mitigate risk, as different sectors of the economy thrive in different times.
For example, technology stocks tend to perform better when the economy is growing than consumer staples, which rely on steady spending by consumers. You can further diversify your stocks by categorizing them by market capitalization, which is a measure of the total value of a company’s outstanding shares. You can also categorize them by sector, which refers to the types of goods and services a company produces.
Some people also prefer to divide stocks by country, as this can be an effective way to increase exposure to foreign markets. But it’s important to keep in mind that a country’s political situation can affect its stock performance. So you’ll want to research countries carefully before making an investment in them. This includes reading government reports and analyzing press releases and media coverage.