Stocks are a form of investment in which you buy shares in companies. These are generally a safer choice than bonds, but you do need to be aware that the value of a company can fluctuate. Nevertheless, they offer the greatest potential for long-term growth.
Historically, stocks have outperformed bonds. This has been true across a wide variety of holding periods, including twelve-month and twenty-year period. Over the last 100 years, stocks have risen much more consistently than bonds, despite many pullbacks and dips.
The most common reason people invest in stocks is to make them grow larger over time (capital appreciation). Over a 15-year period, an average stock return was around 10%-12% (source: Andex 2008). But this is just a number and it can vary from person to person.
Some investors buy stocks directly or through a mutual fund or exchange-traded fund. These are less expensive than investing in stocks directly and often provide exposure to a broader range of businesses.
In addition, they offer some tax control advantages. Investors can sell stocks at any time, allowing them to rebalance their portfolio or limit overconcentration in a certain stock position.
There are several different types of stocks to consider, depending on your investment objectives and risk tolerance. These include common stock, preferred stock and international shares.
Common stock is typically the most common type of stock, with shareholders getting voting rights and a share of the company’s assets if it goes bankrupt or liquidates. However, this also means that you might lose all of your money if the company fails.
Preferred stock is another type of stock that offers additional benefits, such as dividend payments and priority claims on company assets in the event of bankruptcy or liquidation. This makes them a good choice for high-income investors or retirees who require regular income from their portfolios.
Finally, international shares are a category of equities that are held in companies outside the U.S. They can be a great way to gain global exposure, although they can also be volatile.
A great way to invest in the stock market is through an exchange-traded fund, which allows you to participate in hundreds of stocks with one transaction. This approach is especially helpful for beginners.
An important factor in determining performance is the overall mix of investments in a portfolio. As a general rule, the more diverse a portfolio is in terms of asset classes (including stocks) and geographic markets, the better it performs.
Moreover, a well-diversified portfolio will experience lower volatility than a single-company portfolio. This is because a portfolio is more likely to avoid extreme price fluctuations in a single stock.
Historically, dividends have outperformed capital gains in the stock market. This is because dividends represent a portion of a company’s net earnings and are usually paid out before other income such as interest. In addition, they may attract additional tax benefits because they are considered passive income.