Investing in Stocks

Stocks offer the best potential for growth in an investment portfolio over time. But, they also carry more risk and volatility than other investments such as fixed-income securities. Investing in stocks should be part of a long-term financial plan, and you should know how much risk you’re willing to take in order to meet your goals.

A stock represents ownership — or equity — in a publicly-traded company. Companies raise money by selling shares to investors, giving them a proportional claim on the company’s net assets and future earnings. A stock’s price is affected by both the company’s performance and the overall market. For this reason, investing in stocks is often a long-term proposition, as short-term trading can lead to losses as well as gains.

Think of it like this: If you wanted to open a cupcake shop, but didn’t have all the capital needed, you might ask friends and family for a financial stake in your business. If they agree, they’d each invest $1,000 to buy flour, icing and cupcake tins, and they’d participate in the profits and losses of the business as a result. This is how the stock market works, but on a much larger scale.

There are many reasons why people invest in the stock market, from the potential for growing their money over time to potentially profiting from shorter-term stock price movements or even earning an income from dividend-paying stocks. However, it’s important to understand the risk of volatile markets and how to balance these risks with your personal investment objectives.

Stocks can be categorized in several ways, such as by their size, or by their level of volatility. Companies are often grouped into categories such as large-cap, mid-cap and small-cap, with the very lowest priced stocks known as “penny stocks.” A stock’s volatility can also be determined by its interest rate sensitivity – that is, how much the stock’s price fluctuates in response to changes in the interest rates.

Companies may also be grouped by the industry in which they operate. Sectors such as information technology, consumer discretionary and telecommunication services can be highly sensitive to the economy. These stocks tend to suffer when economies slow down, but they can experience a rebound when the economy recovers. In contrast, companies in sectors such as consumer staples and health care are less impacted by the economy.

Investors can also choose to invest in specific dividend-paying stocks, which pay regular dividend payments based on the company’s accumulated earnings. These are also known as passive income investments. Finally, stocks can be categorized by whether they’re cyclical or non-cyclical. Cyclical stocks are those of businesses that rely on customers to make big-ticket purchases, such as travel agencies or manufacturing companies. These stocks typically perform poorly in economic downturns, but can benefit from strong economic growth when consumers return to these types of businesses. Non-cyclical stocks, on the other hand, include companies that sell products or services that consumers need regardless of the economy, such as grocery stores.

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