Investing in stocks is one of the most common ways to grow savings for retirement, education, or other long-term financial goals. However, buying stocks doesn’t come without risk, and it’s important to be aware of how much volatility can affect your investment portfolio.
Stocks are shares in ownership of a company and represent fractional ownership of the company’s assets and earnings. This is distinct from a bond, which functions more like a loan that creditors make to the company in exchange for periodic payments. Companies issue stocks to raise capital from investors, and the company’s share price fluctuates based on current investor sentiment and the company’s performance.
A key benefit of stocks is that they can offer higher returns than other asset classes, especially when held over a long period of time. If you invested $100,000 in stocks in 1997, they would have quadrupled by 2017 (assuming you reinvested dividends). This higher return also comes with greater volatility, as the market often experiences ups and downs.
When it comes to stocks, the most popular investment option is common stock. This is because common stock offers voting rights and may pay dividends. However, there are other types of stocks as well, including preferred stock, which works differently and has different benefits.
Purchasing stocks also makes sense for millennials because they typically require less capital to invest than other asset classes, such as real estate. In addition, most stocks are tradable on a public stock exchange, meaning you can buy or sell them at any time. This liquidity is particularly useful when compared to other investments, such as physical property, which can only be sold once it’s paid off.
As an added bonus, stocks usually pay out quarterly dividends, which can help supplement income. This can be beneficial for a young investor looking to boost their retirement savings. However, it’s important to note that investing in stocks requires patience, as stocks tend to have higher ups and downs than other asset classes.
Before you start buying stocks, it’s crucial to develop a comprehensive financial plan that reflects your goals and investment horizon. It’s also important to determine how much volatility you can tolerate in your portfolio, and how you plan to diversify it. Finally, before you invest in stocks, be sure to review your tax situation and consider how short- and long-term gains are taxed. For example, if you sell stock within a year of purchase, the IRS taxes your gain as short-term capital gains, while long-term capital gains are taxed at a lower rate.