Stocks make up a significant portion of many investors’ portfolios and have the potential to grow wealth and help meet financial goals. However, stocks can also have significant drawbacks, including volatile price movements and the risk of loss. To help manage these risks, it’s important to understand the role stocks play and how to select the right ones for your portfolio.
Stocks, or equities, are the shares of publicly traded companies that are owned by shareholders. Each share represents a fractional ownership stake in the company’s earnings and assets, as well as voting rights. Companies issue stock to raise capital and grow their businesses, and they list shares on a public exchange, such as Nasdaq or the New York Stock Exchange (NYSE). There are two types of stocks: common and preferred.
The primary reason most investors choose to invest in stocks is their potential for growth. Over time, large domestic stocks have historically provided higher returns than other asset classes, such as bonds or cash alternatives.
However, there’s no guarantee that stocks will grow, and volatility can cause substantial losses if held over long periods of time. To minimize risk, a diversified portfolio is generally constructed to include other asset classes that provide income and reduce exposure to stocks’ fluctuations.
When selecting stocks, you can filter your search based on many criteria. For example, you can look for companies that have a competitive advantage in their industry, such as brand loyalty or patents. You can also look for a specific investing style, such as value or dividend investing. Additionally, you can choose to invest in individual stocks or in a fund that tracks an index.
The most common way to buy stocks is through a brokerage, such as Robinhood or E*TRADE. These investment platforms allow you to trade publicly listed stocks with the click of a button. There are many different types of brokerage accounts, each with its own benefits and limitations. Choosing the right one depends on how much money you want to invest, your risk tolerance, and how you plan to use the account.
For some people, the idea of investing in stocks can feel like listening to a language they can’t understand. But, with advances in technology and the rise of online investment platforms, the barrier to entry has dropped substantially. Individuals can now start investing with as little as $500 and build a portfolio over time. This accessibility makes it easier than ever to reach your financial goals. However, before you jump in head first, you should consider these three key questions.