A stock, or share of stock, represents a fractional ownership stake in a company. Depending on the type of stock, it may also give shareholders voting rights and other benefits. Companies often issue stock to raise capital. This money can help a business grow and pay off debt, or fund growth plans that they can’t — or don’t want to — finance with new loans. Stocks can offer a higher return than other investments over the long term. Higher returns can help grow wealth, offset the effects of inflation and boost retirement income. However, stocks can also decline in value. It’s important to understand the risk of investing in stocks and consider your own risk tolerance when deciding how much to invest.
A share of stock is a piece of ownership in a publicly-traded company. Publicly-traded stocks are the kinds you most commonly hear about in the news and on investment apps. They are easy to buy and sell, making them an important part of many people’s portfolios. But there are other types of stocks, too.
Generally, when you buy a share of stock, you’re joining the owner club. You get to participate in the company’s success, and you can make more money if the stock appreciates in value. The value of a stock is determined by supply and demand. If there are more buyers than sellers, the price rises. When more investors want to buy a stock, but there aren’t enough sellers, the price falls. Eventually, prospective buyers and sellers enter the market attracted by the price or the opportunity to sell, and the market finds equilibrium.
There are several ways to invest in shares of stock, including through mutual funds and exchange-traded funds (ETFs). But it’s important to remember that when you buy a stock, you’re buying a slice of ownership in an actual company. You’re sharing in the potential for that company to grow and prosper, but you don’t have all the rights and privileges that the owners of a private business would have.
While the prices of individual stocks can rise and fall, a well-diversified portfolio can offer strong, long-term returns. It’s also a good way to diversify your exposure to economic risks.
The article was written by a CFP® practitioner and provided for general informational purposes only. It is not intended to serve as financial or investment advice, nor does it substitute for a professional evaluation of your unique situation. As such, we encourage you to seek the advice of your professional advisor before making any decisions.
All investments come with some degree of risk, including the potential loss of principal. Stocks have a higher rate of return than most other investments, but they can also lose value quickly. For this reason, it’s essential to build a comprehensive financial plan, determine your investment goals and risk tolerance and diversify your investments.
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