Stocks are a partial ownership in a company, and the hope is that over time their value grows and you can sell them for more than you bought them. But they’re also considered risky investments, often prone to significant fluctuations and the potential for financial loss. That’s why investors typically hold stocks for long-term periods, and seek to achieve high returns over an extended period of years or even decades.
Companies begin trading their shares in the secondary market, which includes IPOs and other ways that businesses raise money and give parts of their business away to investors (like private placements or debt offerings). These are then traded on exchanges like the New York Stock Exchange or Nasdaq. Today there are more than 58,000 publicly-traded stocks in the world.
In addition to offering prospects for capital appreciation, stocks can provide income in the form of dividends. These regular payments are typically a percentage of a company’s profits, and can be used by shareholders to boost their portfolios while still holding their shares. Some companies, especially those in growth mode, may choose to reinvest all or much of their profits instead of paying out dividends, which can help them build even more valuable companies over the longer term.
Historically, the prices of stocks have risen and fallen in line with the overall economic climate. Companies in the “defensive sectors” like utilities, consumer staples, and healthcare tend to have less volatile prices, adding stability to portfolios and calming investor heart rates during periods of economic uncertainty. Examples include Johnson & Johnson (JNJ), Procter & Gamble (PG), and the Hershey Company (HSY), which have managed to maintain strong customer loyalty even in tough times.
Stocks tend to be more volatile than some other asset classes, such as bonds or real estate, and can lose value if markets decline for prolonged periods of time. But they’re known as one of the best ways to grow wealth over time, and the best way to improve your retirement savings. The primary reason is that they’re a way to invest in growing companies, which can deliver better returns than other assets, such as cash or property.
That’s why it pays to invest in companies with solid track records, and to diversify your portfolio with a mix of stocks, bonds, and other investments. The goal is to earn a return on your investment, and the best chance of success comes when you diligently put your savings to work month after month, with an eye on long-term results. The stock market is an essential part of the American economy, and a powerful tool for building wealth. The key is knowing how to use it.