Stocks — also known as company shares or equities — are a fundamental part of many investors’ plans to build wealth. But the financial industry is full of complicated terminology that is often difficult to understand. That’s why we’re here to help you decipher the key concepts and the jargon that might be confusing you.
When a public company issues stocks, it is essentially selling a share of its ownership. Investors buy those shares, and hope that the companies prosper over time and the value of their shares increases. This is what makes the stock market so attractive – it can potentially outpace inflation, and provide the opportunity to grow your money over time.
Stock prices fluctuate throughout the day, depending on a variety of factors, including global economic news, company results and investor sentiment. Stocks are also a great way to diversify your portfolio and expand your exposure to the economy, with opportunities across many sectors of the economy.
But if you want to make a long-term return on your investment, it’s important to understand that stock values are not guaranteed to increase over time. If a company’s business declines, or if the company is unable to pay its debts, its stock could lose value. That’s why it’s important to have a well-diversified portfolio and diversify your investments to minimize the risk of losses.
As a result of the many factors that influence stock price fluctuations, it’s important to understand that not all stocks are created equal. Stocks can be classified as growth, income or value. Growth stocks are companies that are growing earnings and revenue faster than their industry or the overall market. These companies may not pay dividends, instead reinvesting the profits into the business for future growth and a potential higher stock price.
Meanwhile, value stocks are companies with a lower price relative to their fair value, which is the intrinsic value of the share based on the company’s fundamentals. These companies are often able to generate stable or even rising profits, and therefore, have the ability to pay dividends in the future.
In addition, the type of stock you hold may determine whether or not you can vote at shareholder meetings, receive dividends and get your money back if the company fails. There are also different types of stocks based on their size: large-cap, mid-cap and small-cap.
The more you know about the different aspects of stocks, the better you can choose which ones might be a good fit for your wealth plan. With the right research and a solid portfolio strategy, you can invest in stocks confidently.