Stocks are an integral part of many people’s financial plans. They help people grow their savings and plan for long-term goals like retirement or educational expenses. Historically, stocks have delivered solid returns over the long haul — though they’re not without risk. It’s important to have a good understanding of how they work and what you can expect from them before making any investments.
Buying shares of a company means owning a tiny fraction of that business. As a stockholder, your goal is for the value of that company to go up while you’re a shareholder. That increase can come in the form of capital gains or dividends, both of which are a part of the average return on stocks since 1956.
Private companies sell shares of their business, also known as stocks, to investors in order to raise money for growing their operations. Once a company lists its shares on a public exchange, it becomes a publicly traded company. This allows shareholders to buy and sell their shares of the company through brokers on a trading platform, such as the New York Stock Exchange or the National Association of Securities Dealers Automated Quotations, or NASDAQ.
The price of a stock is determined by the laws of supply and demand. If there are more buyers of a stock than sellers, the price will rise. If the opposite is true, the price will drop. This is based on a number of factors, including financial performance, future expectations, government regulations and the economy.
There are several types of stocks, and each one has a different purpose in an investment portfolio. For example, growth stocks are those that have strong earnings growth. They can have a higher price-to-earnings ratio than value or income stocks, but their future prospects are usually promising. Investors may also opt for blue-chip stocks, which are those from well-known businesses that have a track record of stability.
As a shareholder of a company, you’ll get the right to vote in corporate decisions, such as board members and mergers. In most cases, however, common stockholders aren’t given the same voting rights as preferred stockholders.
A big benefit of investing in stocks is that the profits from your share sales are tax-deductible, assuming you hold the stock for at least five years. However, if you sell your shares for less than the price you bought them for, you’ll owe taxes on that difference.
While the promise of high returns can be alluring, it’s important to remember that over time, large-company stocks, as a group, have lost money about one out of every three years. That’s why it’s important to diversify your portfolio with stocks from a variety of industries and geographies. You’ll also want to include stocks in a range of price levels, so you can take advantage of opportunities as they arise.