Stocks, company shares, equities—whatever you call them, stocks are an essential part of many investors’ plans to build wealth. But that doesn’t mean they’re easily understood. They’re complex investments that have the potential to grow your wealth, but they also come with some significant risks.
Stock market investments may offer higher returns than other investment types, such as bonds or real estate. The price of a stock, however, can rise and fall in relation to the value of the companies that are owned, so you should consider the potential for volatility when building your portfolio.
A stock represents fractional ownership in a publicly traded company. Companies issue stock to raise money and grow their businesses, and the type of share (common or preferred) held determines what rights shareholders have. For example, a shareholder’s equity in a company gives them the right to vote on major business decisions and receive annual learn reports.
The reason stock prices can rise and fall is that investors buy and sell shares. Each time a new investor comes on the scene, supply and demand shifts. A rising supply usually results in a lower price, while a falling supply can cause the price to go up. Similarly, when a company announces strong earnings, its stock price may rise. However, if the company falls short of its earnings expectations, the stock price could drop.
Investing in the stock market can help you reach your financial goals, but it’s important to diversify your portfolio to reduce the risk of volatility. Talk to a financial advisor to see how adding stocks to your portfolio can benefit you.
As a long-term investment, stocks have the potential to outpace inflation. However, because they carry more risk than other investment products, stocks aren’t appropriate for everyone. If you’re concerned about the level of volatility you’re comfortable with, you might be better suited to a diversified approach with other assets like bonds or real estate.
Inflation and the threat of a recession are making it harder for many companies to make money, and the prices of their stock are reflecting that. As a result, many companies have been cutting dividends to save money and invest in growth initiatives.
While some companies still pay a dividend, most don’t—particularly young and rapidly expanding firms that are focusing on growing their business. They’re more interested in reinvesting their profits into themselves, which will ultimately lead to even greater gains in the future and a higher stock price.
Buying individual stocks is possible with the help of a brokerage. Once you have an account, you can place a stock order—which tells your brokerage what you’d like to buy and at what price—and it will execute the transaction. You can also purchase shares through mutual funds and exchange-traded funds (ETFs), which can diversify your portfolio while giving you a low-cost, transparent way to gain exposure to different markets.