Stocks are a cornerstone of many portfolios because they offer the potential for higher growth than bonds or cash alternatives. They can also help diversify a portfolio by adding exposure to sectors and geographies that may otherwise be underrepresented.
For investors, stocks represent partial ownership of a publicly traded company. A single share of a stock reflects fractional ownership of the company, and as the number of shares increases, so does the investment stake. Investing in stocks is often done to earn income from dividends and participate in gains or losses as the value of the shares rise or fall.
Generally speaking, public companies issue stock in order to raise money to grow their businesses. They might need to design new products, hire more employees or expand into new markets, and the proceeds of the sale of those stocks will help fund that expansion. In return, shareholders are expected to participate in any profits that the company makes.
Stock prices can fluctuate for a variety of reasons, from the economy and global markets to news about a specific company. Over longer periods of time, however, the main driver of a stock’s performance is how well the company has been doing in terms of revenues and earnings.
When the price of a stock goes up since it was bought, that’s known as appreciation. The increase in value can be a result of many things, including better financial performance, technological innovations and a more desirable product. In some cases, a company’s stock can become more desirable simply because it has gained a reputation for being a safe and reliable investment.
As with any investment, it’s important to diversify a stock portfolio and limit the amount of your money that you put into one company or sector. That’s why it can be helpful to consider investing in a variety of different types of stocks, such as large domestic, small domestic and international equities.
Whether you’re a long-term investor, looking for steady retirement income or preparing for a major life event like buying a home, stocks can be an important part of your portfolio. But they don’t always produce the same returns, and you could lose money on an investment in stocks if you’re not prepared for the risks that come along with them.
That’s why it’s important to understand the basics of stocks before you begin making investments. We’ll walk you through the most important factors to consider and provide resources to help you make confident decisions. We’ll also explain how to diversify a portfolio with stocks and how to manage risk, so you can focus on what matters most — achieving your financial goals.