How to Invest in Stocks

Stocks are a cornerstone of many investment portfolios. They offer the potential for higher growth than other asset classes, such as bonds and cash alternatives. However, stocks can come with significant volatility and should be considered a long-term investment. In addition, the stock market can be a source of income through dividends.

Individual shares of publicly-traded companies represent a portion of ownership of that company, and are bought and sold on the New York Stock Exchange (NYSE) and Nasdaq. When a stock rises in value, you can sell it for more than you paid for it. This is called capital appreciation. A share of stock also entitles you to a proportional claim on a company’s net assets and future earnings. These claims are established on a per-share basis, with each share granting you the right to vote in shareholder meetings, receive declared dividends and sell your shares to other investors.

A stock’s value can increase for a number of reasons, including a strong economy, rising demand for the product or service of a company, a successful marketing campaign and more. Companies often use the proceeds from sales of their shares to pay down debt or finance growth plans that they can’t or don’t want to fund with new loans. The growing value of a company’s shares also provides an opportunity to buy into a business for less than its overall value.

The most common way to invest in stocks is through mutual funds, which hold a broad range of stocks and provide diversification among companies, industries, sectors and geographic markets. Individual stocks can also be purchased on a regular basis through a broker or financial planner, or by opening a brokerage account online. You can then select the stocks you’d like to purchase by placing an order with your brokerage. This tells your broker how many shares you wish to own and at what price.

While it is possible to make money through the sale of shares, this may not be an option for all investors. Buying and selling stocks on a regular basis can be more expensive than investing with a passive approach that allows for a more consistent long-term return.

Stocks can help you grow your wealth by delivering two major returns: capital appreciation and dividend income. The former reflects the growth of a company’s operations, whereas the latter is the result of a company’s profits. Not all companies pay dividends, and those that do can slash or eliminate their payouts at any time.

The key to success when it comes to stocks is diversification. By spreading your investments across a range of companies, sectors, regions and sizes, you’ll likely be able to ride the peaks and valleys of the market without getting too euphoric or too fearful. Remember the story of the tortoise and the hare to keep your emotions from derailing your financial plan. By following the slow and steady approach of the tortoise, you can build a nest egg that will serve you well over your lifetime.

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