Stocks are a vital part of many investors’ wealth-building plans. But, while stocks have a history of high returns, they also come with risk and can decline in value in the short term. That’s why it’s important to understand what they are, how they work and how to best use them in your portfolio.
Stock is a share in the ownership of a company. It’s the smallest piece of ownership that you can own in a public company, but it represents your opportunity to share in the profits of the company if it succeeds. Conversely, if the company fails, your investment will likely decline in value. There are a variety of factors that can affect a stock’s value, including:
When people talk about investing in stocks, they often mean common stock or shares of a publicly-traded company. These shares allow owners to make money from the growth of the company, and they may provide voting rights and other benefits, depending on the type of stock. These types of stocks are often referred to as class A, B or C, which can indicate voting rights and ownership control. They are also commonly labeled as blue chip, which can mean that the company is established and generally stable, or growth, income or value, which can indicate whether the stock is expected to grow, pay dividends or offer future cash flow.
Generally, companies are divided into groups based on the total market value of their shares–the “capitalization.” These groupings include large-cap, mid-cap and small-cap stocks. Larger companies tend to be more stable, while smaller companies typically have greater potential for growth.
A company’s stock price can also be influenced by macroeconomic trends, such as the country’s unemployment rate or inflation. Similarly, investor sentiment can play a role in stock prices. If the investor community believes that a company is about to fail, their demand for the stock will decrease, causing its price to drop.
To determine how much of your portfolio to allocate to stocks, you must consider your personal goals and risk tolerance. While stocks can have higher returns than other investment products, they can be more volatile and have the potential for higher losses than other investments. That’s why it’s important that you build a comprehensive financial plan that takes into account your investment horizon and level of risk tolerance. From there, you can develop a portfolio that maximizes the potential for growth without exposing you to too much risk. Using these strategies can help you feel confident that your assets are working in tandem with your plan to reach your retirement or other long-term objectives.