Stocks are a key part of a well-balanced investment portfolio. Understanding what they are and how they work helps you choose the right stocks to help you reach your goals.
A stock is a share in the ownership of a publicly traded company, including a claim on its earnings and assets. When a company grows, its stock prices typically rise and when the business struggles, share prices usually fall. Companies sell shares to raise money for growth and operations. The public can then buy or sell these shares through stock exchanges. The two largest exchanges in the United States are the New York Stock Exchange (NYSE) and Nasdaq.
When a company first offers its stock, it’s known as an initial public offering (IPO). At the IPO, the company discloses how many shares will be sold and sets an IPO price. Investors can then purchase shares of the company directly from the IPO or on the secondary market.
The primary purpose of stocks is to give investors the chance to grow their wealth in tandem with the economy. Historically, stocks have been one of the best places to grow your wealth over the long term, outpacing inflation.
However, it’s important to remember that stocks are not a guaranteed way to increase your wealth. They can also lose value over time and may decline due to market volatility or specific events, like a product recall.
To minimize risk, it’s a good idea to build a diversified investment portfolio, which includes stocks, bonds, real estate and other investments. This can help you achieve your financial goals and reduce the impact of market volatility on your portfolio.
A big reason stocks are a core investment is that they often perform well in the long run, providing an average annual return of about 10% since 19281. But as we’ve seen in recent years, returns can be more volatile than in the past.
The performance of a stock depends on a number of factors, from general market conditions to the individual business itself. For example, if a company announces a new technology that’s expected to revolutionize an industry, its stock might rise because more people want to invest in it. On the other hand, a company that is struggling with allegations of corruption or other issues might see its stock prices fall.
It’s also important to note that stocks can be affected by global events, like wars, natural disasters and changes in interest rates. These types of events can impact all markets or specific industries.
A company’s stock can also be categorized by its size. There are large-cap, mid-cap and small-cap stocks. The smallest stocks are sometimes called “microcap” stocks and are generally considered very speculative. These are typically low-priced and don’t pay dividends. They’re more risky than the larger types of stocks, but they can be a great option to add to a diversified portfolio.