Stocks are a key component of many investors’ portfolios. They generally have a long track record of providing higher returns than bonds and cash alternatives. But stocks can also be riskier, and the value of shares can fluctuate. It’s important to carefully assess your risk tolerance and financial goals before investing in stocks.
Stocks (also called equities) are small percentage ownership stakes in publicly traded companies. When a company issues shares, it’s raising money to fund its growth. It can sell the shares to anyone who wants to invest in the company, and they are bought and sold on stock exchanges such as the New York Stock Exchange and Nasdaq.
A stock’s price is influenced by several factors, including macroeconomic trends and the company’s performance. If a company has a problem that makes investors fear for its future, like a competitor releases a new product that threatens sales, the share price may drop. But if a company is growing fast and earning big profits, its shares can increase in value.
For individual investors, the most common way they make money from stocks is through capital appreciation — when the company’s share price rises over time. But they can also earn dividends, which are payments that a company sends to shareholders based on the company’s profit. Companies usually pay out dividends to preferred stockholders before paying common stockholders.
There are thousands of stocks that trade on the NYSE and Nasdaq, but it can be difficult to identify which ones have the potential to grow over the long term. Investors should consider a well-diversified investment portfolio that includes stocks from both large and small companies, as well as both domestic and international markets.
If you’re willing to hold onto a stock for a long time, the average annual return has been about 9.5% since 1802 (before inflation). And that’s why stocks are a big part of most retirement plans and other investment accounts.
But if you’re a short-term trader, the volatility of stocks can be nerve-wracking. A sudden market decline can wipe out a chunk of your portfolio, and the stock prices can drop much faster than you expected. That’s why it’s important to have a plan and stick with it when investing in stocks. The more you learn about the market, the better your chances are of navigating it successfully.