Stocks are ownership stakes in publicly traded companies that can be used to grow wealth and outpace inflation over time. They’re also an important part of most financial portfolios because they provide a source of income through dividends and capital gains.
Companies issue stock to raise money that they can use for business initiatives such as creating new products, hiring employees or expanding operations. The hope is that those stocks will rise in value, allowing shareholders to sell them for more than they paid. Stocks are a great way to participate in company growth, but they can also be volatile and carry the risk of losing value.
When deciding whether to invest in stocks, consider your financial goals and your tolerance for risk. A good place to start is with your credit score, which can help you understand how much you can afford to lose if the market declines. Once you have a clear picture of your finances, you can decide how to diversify your portfolio by determining what types of investments you want to make.
There are many ways to classify stocks, including by size and industry. For example, some investors focus on large-cap stocks that have a higher dollar value than smaller competitors. Others look for blue-chip stocks, which don’t have a formal definition but are considered stable, mature companies with a reputation for quality. Still others may invest in small- and mid-cap stocks, which are often more volatile but have the potential for outsized gains.
Stocks can also be grouped by type, like growth or value. When you choose growth stocks, you’re looking for a company with the potential to increase its revenue and earnings faster than its industry and the overall market. In contrast, value stocks are purchased when a share appears undervalued compared to the company’s financial performance.
Other factors that can influence the value of a stock include macroeconomic trends, investor sentiment and media coverage. A recession can cause stocks to drop, for example, as investors panic and try to protect their wealth by selling their shares. On the other hand, strong economic conditions can boost the value of stocks because consumers feel more confident about spending money on goods and services.
Historically, stocks have provided higher returns than other asset classes, such as bonds or savings accounts. They can help you achieve your investment goals over the long term, assuming you can stomach the ups and downs of the stock market.
In addition to providing higher returns, stocks can be a good diversifier for your portfolio because they can reduce the impact of inflation over time. However, they can also carry the risk of loss if you buy them too high or sell them too low. To minimize this risk, it’s important to follow a well-planned strategy and stick with it over time.