Stocks are an important part of many investment portfolios. They offer the potential for long-term growth and provide a higher return than investments like bonds. However, they also expose investors to near-term volatility. Investors can purchase stocks to make money from dividend payouts and price appreciation, or they may buy them to receive a cash flow stream through capital gains when they sell the shares at a profit.
The value of a stock depends on how much demand there is for the company’s products and services. When demand is high, the share price rises, and vice versa. A stock’s price can be influenced by many factors, including business forecasts and market conditions. The fields of fundamental and technical analysis seek to understand these factors.
A publicly-traded common stock represents a fractional ownership of a corporation. When a new company goes public, it issues stock to the general public in its initial offering (IPO). This gives shareholders the opportunity to earn a return from investing their money in the company. Investors can also use derivatives, such as options and futures, to leverage their investments or create a synthetic ownership stake in companies.
For long-term investors, stocks have a history of providing higher returns than cash alternatives, such as bank certificates of deposit or Treasury bonds. This average annual return, however, fluctuates from year to year and differs between individual industries and regions.
In addition to the potential for dividends and price appreciation, stocks can be a great way to diversify your portfolio. Unlike bonds, which are highly sensitive to interest rate movements, stocks tend to perform well in most economic environments. Some stocks are known as cyclical, such as manufacturing or travel companies, because their revenues can decline quickly when the economy weakens. Others are categorized as non-cyclical, such as grocery chains or consumer product manufacturers, because their sales tend to be more stable even when the economy is strong.
Investing in stocks isn’t for everyone, and it’s important to consider your own personal financial goals and tolerance for risk before making a decision. For some people, the right balance may be a mix of assets that includes both stocks and more conservative investments such as mutual funds and CDs.
To learn more about the benefits of owning stock and how it fits into your investment plan, schedule a meeting with an Edward Jones financial advisor. We can help you develop a comprehensive financial plan that helps you reach your goals.