Investing in Stocks

Stocks are an important part of many investment portfolios, and they can help you achieve long-term growth by investing in public companies. When a company issues shares of stock, it invites investors to purchase a fractional ownership stake in the corporation. The shares are referred to as “equity” or “stock.” Stocks can be purchased separately or through mutual funds and exchange-traded funds.

The primary reason investors own stocks is for their potential for growth (capital appreciation). Companies that grow their businesses over the long term typically generate higher returns than most other types of investments, such as bonds or cash alternatives. Investors who stick with stocks for the long haul, over 15 years or more, have historically earned strong returns on their investment.

In the shorter term, however, a stock’s performance may depend on a wide variety of factors, including investor perceptions about future prospects for the company and its industry. Economic factors, such as rising interest rates or political uncertainty abroad can also affect a stock’s price. In addition, individual stocks can fluctuate in price second by second as traders buy high on greed and sell low out of fear.

Companies that choose to distribute dividends to their shareholders can add a regular income stream to your portfolio. These payments are usually a percentage of a company’s net earnings and can be received in the form of cash or reinvested into more shares of the company. Some companies withhold dividends, choosing to reinvest all of their profits in their business with an eye toward creating future capital gains for shareholders.

Investing in stocks may also provide tax advantages, depending on your investment strategy and how you own them. When held in a qualified retirement account, stocks can be sheltered from taxes until you reach retirement age. If you invest in stock mutual funds or exchange-traded funds, your purchases and sales are generally taxable on a quarterly basis. In contrast, if you own individual stocks in a brokerage account, you may be able to defer capital gains on sales until you are in a lower tax bracket.

Regardless of how you hold your stocks, prudent investors aim to diversify their positions to minimize near-term risk and maximize long-term returns. They build diversified portfolios that include stocks in many different industries and geographic regions to ensure balanced exposure. This can help reduce volatility, and it may also help protect you from some market risks, such as interest rate changes, political turmoil or natural disasters.

This entry was posted in Uncategorized. Bookmark the permalink.