Stocks are a key part of many investors’ plans to grow their wealth. Also called company shares or equities, stocks are ownership stakes in public companies that trade on the stock market. Like any investment, stocks come with risks and should be carefully weighed against your personal goals and risk tolerance. But with the right research and help from a financial advisor, stocks can be an effective way to achieve your investing goals.
When a corporation wants to grow, it needs to raise money to pay for expenses like designing new products or expanding into new markets. Companies sell shares of their stock to raise funds. Investors who buy those shares can then profit when the company grows and the stock price rises. In some cases, companies distribute dividends (a share of profits) to shareholders as a way to reward them for their investments.
There are several different types of stocks, which differ based on the size of the company and how much it makes per share. The largest companies make up what are known as large-cap stocks, while mid-sized and small-cap companies offer a variety of options for their investors. Very small companies are sometimes called microcap stocks and may have little or no revenue, which can make them a more speculative investment.
The value of a stock can fluctuate widely, depending on the market and economic conditions, company performance and global events. These swings can be especially volatile for investors with lower risk tolerances. But, historically, stocks tend to rise over time and offer a good opportunity for long-term growth.
Unlike some other investment options, like real estate, stocks can be easily sold and liquidated at any time. This liquidity makes it easier for people of all income levels to start building their investing portfolios.
Investing in stocks can also help diversify your portfolio and protect you from the risk of over-concentrating your assets in one particular asset class. That’s because stocks have historically correlated closely with the economy, meaning that when the economy thrives, stock prices often rise.