Stocks are ownership stakes in publicly traded companies that can grow your wealth by outpacing inflation, if they rise in value. Stocks can also provide dividend income. But stocks come with significant risks—they can lose value or even go down completely. Whether you are investing for the long haul or trying to profit from short-term trends, it’s important to understand how stocks fit into your overall investment portfolio and how they may be affected by broader market movements.
When a company wants to grow, it often raises capital by issuing new shares of stock. That money is used for everything from designing new products to hiring more people and expanding into new markets. If it does well, the company’s profits will rise, and you can potentially reap a return on your investments (capital appreciation). However, if the company fails to perform as expected or experiences an unexpected crisis, its share prices may fall.
The price of a stock is set by many people trading it in a free, open market—most commonly on a public exchange. This process is driven by supply and demand—the more people want to buy a stock, the higher its price; the more people want to sell it, the lower its price. This type of market can be volatile, and it’s why it’s important to diversify your investments—buying stocks in a wide variety of industries and countries.
A key feature of stocks is the voting rights they give shareholders. Generally, the more shares you own, the more votes you have at shareholder meetings and in proxy ballots for directors of the company. You can use this power to influence how the company is run, including putting pressure on the board for changes in management or business strategy. As a shareholder, you’ll receive annual reports that summarize the company’s performance and future plans. You can also attend annual company meetings to discuss the current period’s operations and management decisions with other shareholders.
While historically, stocks have provided good returns, that doesn’t mean they have been a great choice for every investor. In fact, if you invest over the long-term, stocks can be quite volatile and even experience losses, which is why it’s important to have other investments in your portfolio—such as bonds, cash, real estate and commodities.