Stocks are a key component of many investment portfolios. They are known for their potential for growth and have historically had higher rates of return than bonds or cash alternatives. However, they can be volatile and may lose value if you are not positioned properly.
A share of stock represents fractional ownership in a public company. When a corporation wants to grow, it needs money to design and produce new products, hire people and expand into new markets. Companies raise this capital by issuing shares of stock on the market. As more and more investors buy those shares, the company’s stock price rises and its shareholders are poised to profit from the company’s future growth.
Stock prices can vary for a number of reasons, including overall market volatility and events that affect individual companies. This is why it’s important to diversify your investments across different sectors and industries.
Choosing the right stocks for your portfolio can be challenging, especially as a beginner investor. For beginners, we suggest screening for positive net income in at least four of the past five years, easy-to-understand business models and a market capitalization of at least $100 billion. Those criteria will help you find stocks that have the potential to grow in value over time and that are not too risky given your own personal investment tolerance.
Once you’ve narrowed down your list of candidates, it’s worth checking the investment commentaries available for each stock to see what the analysts are saying about them. We suggest focusing on those that have “buy” ratings from most or all of the major analysts. These are the analysts who have the highest confidence in a stock’s performance.
You can also categorize stocks based on their size, which is shown by the market capitalization of each company. These are called large-cap, mid-cap and small-cap stocks. Large-cap stocks are the largest publicly traded stocks. Small-cap stocks are those that have a market capitalization of $2 billion or less. There are also a number of micro-cap stocks, which have market caps of $10 million or less.
Another way to categorize stocks is by dividend yield, which reflects the amount of annual earnings that a stock pays in dividends. For example, a stock that yields 3.5% would pay out 3 percent of its annual profits in dividends. High dividends are attractive to investors who seek steady streams of income from their investments.
As you consider the different types of stocks for your portfolio, it’s important to keep in mind that a successful investment strategy requires patience. Be sure to speak with a financial professional about your goals and how they might be impacted by stocks. If you’d like to learn more about how stocks can fit into your investment plan, contact Edward Jones for a free consultation.