Stocks, company shares, equity — whatever you call them, they’re one of the key building blocks of a diversified investment portfolio. They’re a powerful wealth-building tool, but also a volatile one that can cost you money and delay your progress if not done right. So, let’s break down the basics of stocks so that you can make sound investment decisions.
A share in a public company represents fractional ownership of that company’s assets. This means that if the company grows and prospers, your ownership stake will grow as well. This is what’s known as a capital gain, and it’s the kind of return that can help you accelerate your financial goals.
In addition to providing a potential opportunity for growth, stocks also offer investors the potential to participate in dividend payments and profit distributions. Some companies pay these dividends to shareholders, while others may choose to reinvest the proceeds back into the business for further expansion. This type of income can supplement your retirement income, and it’s an important part of your total return on a long-term investment.
You can invest in individual stocks, or you can buy stocks in a pre-arranged “basket” through mutual funds, Exchange-Traded Funds (ETFs), and other options that have lower management fees than individual stocks. Many of these products are available through your brokerage account, so you can build the right portfolio for you without incurring additional management expenses or taking on too much risk.
There are two types of stocks: common and preferred. Common stocks, which are the ones that you probably think of when you hear the phrase “stock market,” give stockholders proportional ownership of a company and voting rights. These benefits are what most individual investors seek when purchasing this asset class.
Preferred stock does not come with voting rights, but it gives preferred investors priority in receiving profits and liquidation proceeds before common stockholders in the event of a company liquidation. This is what differentiates this asset class from common stock and makes it a less risky option for most individual investors.
The price of a stock will rise and fall in response to many different factors, including macroeconomic trends, consumer sentiment, investor confidence and media coverage. While you can’t completely eliminate price volatility, careful planning and diversification can help you achieve a long-term return that exceeds the inflation rate.