Stocks are small slices of ownership in a company, offering potential returns as the company grows. Investors can buy and sell stocks in public markets, and prices fluctuate based on demand, supply and other market factors. While stocks may seem risky, over time they tend to outperform other investments like bonds and long-term savings accounts.
The word “stock” can refer to many types of investments, including mutual funds and exchange-traded funds, as well as the companies listed on public stock markets. However, when most people talk about “stocks,” they’re usually referring to publicly traded stocks that are bought and sold on stock exchanges. These are the stocks you may be thinking of when you hear about the “stock market” and its wild swings.
Investing in stocks is important for most investors because it can help them grow their wealth over the long-term and reach their financial goals. However, it’s also important to understand the risks involved with investing in stocks and how they work within a portfolio.
Stocks are a key part of most investors’ retirement-savings plans because they offer higher returns than other assets like bonds and cash. But they can be volatile, and the jargon associated with stocks can make them intimidating for beginners. This article will help you understand the basics of stocks and how they work so that you can begin to build your portfolio.
The value of a stock is based on the amount individuals are willing to pay for it. When demand for a stock rises due to favorable news, positive profit outlook or investor enthusiasm, its price will go up. Similarly, when demand decreases, as it often does in the wake of bad earnings or negative news, the price will fall. This constant flux in demand and price is the essence of the stock market, where the collective actions of buyers and sellers constantly negotiate new prices with each other.
There are two main types of stocks: common and preferred. Each offers its own set of benefits and risks, so you’ll need to decide what kind of stocks are right for your goals. For example, you might want to choose common stocks for growth or prefer to invest in preferred shares for income.
Before you start investing in stocks, it’s helpful to have a plan and a strategy in place. You’ll need to determine how much of your portfolio you want to allocate to stocks, and then figure out how you’ll buy them. One way to buy stocks is through a retirement-savings account like a 401(k) or an individual retirement account (IRA). These accounts let you invest money from your paycheck, pre-tax, and avoid paying taxes until you withdraw it in retirement.
Another popular way to invest in stocks is through mutual funds or ETFs (exchange-traded funds). These are pools of investments that trade on the stock market just like single stocks do. They typically track a particular index, such as the Dow Jones Industrial Average or the S&P 500, and can be a good way to diversify your portfolio without having to research and buy individual stocks.