Are you interested in investing, but find the whole idea a little overwhelming? Stocks are an important tool in your wealth-building arsenal, but they can also cause you a lot of heartache if you don’t approach them with the proper care. Like the old story of the tortoise and the hare, it’s usually best to take your time when buying stocks.
A stock is a financial security that represents ownership of a company (see equity). When you buy a share of stock, you are buying a fractional claim on the company’s net assets and future earnings. Depending on the type of stock you own, you may receive dividends or have voting rights at shareholder meetings.
When a company is looking to grow, it needs capital to pay for expenses such as designing new products, hiring more people and expanding into new markets. Companies can raise this capital by selling shares of stock on a public market, such as the Nasdaq and the New York Stock Exchange. Investors can then purchase these shares and profit if the company grows.
Investing in stocks can be a great way to grow your money and outpace inflation over the long term. As a stockholder, you may receive quarterly dividends and benefit from price appreciation when the company does well. However, not all stocks pay dividends and not all appreciate in value, so careful investors build diversified portfolios that include both.
Stocks have been around for nearly a millennium. The first publicly traded corporation was a joint-stock company in Europe, the East India Company, established in 1602. This company used its shares to raise funds for the adventure of exploring the world. Today’s limited liability company, with its regulated accounting practices and corporate governance, is a descendant of the joint-stock company.
The primary function of a stock market is to match buyers and sellers. Whenever there are more prospective buyers than sellers, the prices of stocks rise. Eventually, prospective sellers enter the market and/or buyers leave, and the price achieves equilibrium.
A company’s stock can be sold individually or as part of a mutual fund, exchange-traded fund or retirement account. While mutual funds and ETFs can be an excellent investment option, it’s often better to own individual stocks because they provide greater control over your portfolio’s allocations.
Whether you’re considering your first foray into the stock market or have already been an active trader, understanding how stocks work can help you understand how they affect the economy and how to maximize their potential for growth. If you keep this information in mind, it can be easy to get caught up in the excitement of the markets without letting it distract you from the long-term goals you have for your portfolio. Then you’ll be in a much better position to stay the course and avoid the pitfalls of overtrading and poor timing. This is one of the most common mistakes made by investors, especially beginners.