Stocks — also called shares or equities — are one of the most common assets that you can buy and hold as part of your investment portfolio. While stocks can offer a great opportunity for growing your wealth, they are not without their risks and should always be considered long-term investments.
A share of stock represents a portion of ownership (equity) in a publicly-traded company, giving you a proportional claim on the business’s net assets and future earnings. The value of your investment in a particular stock is determined by the sales, growth or profitability (or lack thereof) of the underlying company as well as general market factors such as economic health, interest rate conditions and more.
When a public company issues stock, it is basically selling ownership in the organization to investors to raise capital to grow or expand. It may also be used to pay off debt, launch new products or services and more. Unlike real estate, which can be a highly-taxed investment, stocks are generally more tax-efficient because they are traded on a public exchange like the Nasdaq or New York Stock Exchange.
Companies issue stock to attract new investors in the hopes of increasing their revenue and profits, which, over time, can result in a higher value for the company’s equity. Stocks tend to have a higher historical return than many other types of assets, including bonds and cash.
However, the higher potential returns of stocks come with a greater level of near-term volatility than other assets. This volatility can make it more challenging to manage risk and generate solid, consistent returns over the long term.
For this reason, it’s important to diversify your portfolio with a variety of different assets. You can invest directly in individual stocks, through brokerage accounts with individual brokers or financial planners, or you can purchase mutual funds, index funds and Exchange-Traded Funds (ETFs) that are pre-arranged “baskets” of various assets. Buying through a brokerage account is typically more cost-efficient, but be sure to look at fees such as management and transaction costs before you buy.
ETFs in particular can be useful for beginners as they often don’t have any fees at all, making them very affordable to own and track. Another benefit to investing in stocks is that it’s relatively easy to buy and sell them. For instance, you can open a brokerage account online or at your bank and be ready to buy or sell in minutes.
If you want to hire a professional to manage your portfolio, there are many options available for fees under 1%. Some of these options even allow you to use your retirement, health savings or 529 account to invest in stocks.
Lastly, stocks are more easily liquid than other types of investments such as real estate. This makes it easier for you to access your funds at any time, which can be helpful if you’re planning on retiring soon or need money for other expenses.