Stocks can be a powerful wealth-building tool, but they can also delay your progress and cost you money and heartache if you approach them in the wrong way. There’s a smart, steady way to buy stocks, and it’s important to take the time to learn what they are and how they work before jumping in.
Stock ownership means you own a small piece of an entire business. When a company goes public, they sell shares (think of them like little squares cut from a big sheet cake) to raise money and fund growth. When a company grows and becomes more desirable, its stock price increases and you can eventually sell your shares for more than you paid for them.
This is what makes stocks a great long-term investment. Stocks have historically been one of the best ways to grow your wealth because they provide higher returns than bonds or cash alternatives, and have a strong correlation with the economy overall.
In addition to potential capital gains, stocks can pay dividends. Dividends are periodic payments a company gives to stockholders when it earns a profit. These can be used to supplement your income or help you pay for living expenses. However, you’ll need to be patient and disciplined because dividends aren’t guaranteed.
If you own shares of a publicly-held company, you’re entitled to some level of voting rights. Common stockholders are given a vote on matters that may affect the company, including policies, board decisions and mergers and acquisitions. There are different types of shares, though, and preferred stockholders usually don’t receive the same voting rights as common stock. Preferred stockholders are also given a priority when it comes to receiving profits or liquidation proceeds from the company before other classes of shareholders.
You can invest directly in individual stocks or in mutual funds and exchange-traded funds (ETFs), which automatically diversify your portfolio by buying hundreds — sometimes thousands — of different companies. These are great options for new investors who don’t have the time or resources to hand-pick stocks. However, a good financial professional can recommend investments that meet your unique goals and risk tolerance.