Stocks, company shares, equities — whatever you call them, these investments are an integral part of many investors’ plans to build wealth. And there’s a reason for that: stocks offer the potential to generate high returns over time, often beating inflation. However, the stock market can also come with its share of ups and downs, so it’s important to understand the risks before investing.
When a public company goes public, it sells small “shares” of its business to people in order to grow. Picture a big sheet cake cut up into lots of little squares—each slice represents a piece of the business, and each investor owns that slice. As long as the company grows and remains healthy, the stock price will increase, allowing shareholders to make money.
In addition to increasing in value, some stocks pay out dividends, which are a form of profit sharing with shareholders. The amount of money you receive depends on how much the company makes and whether it has enough cash left over to distribute the dividends. It’s common for larger companies to pay out dividends, while smaller companies may not.
Aside from being an opportunity to participate in growth, stocks are also a way to diversify your portfolio. If you invest in different companies, each of those businesses will react differently to changes in the economy or global events. This diversification is called diversification, and it helps reduce the risk of losing all your money if the stock market crashes.
The way that stocks are classified differs from one investment system to another, but most systems include categories like information technology, consumer discretionary, and energy. It’s important to understand how the sectors react to the economy as a whole so you can build a balanced portfolio.
As with all investments, there is no guarantee that you’ll earn a return on your stocks. But if you have money that you won’t need for a while, it’s an attractive option for growing your wealth over time. You’ll be able to earn more than you would with other types of investments, such as savings accounts or Certificates of Deposit (CDs).
Before you invest in stocks, consider your financial goals, including when you’ll need the funds. This will help you determine how much risk you’re willing to take. You’ll also want to think about your personal values, such as sustainability and social justice. You can use these values to choose companies that align with your beliefs. These are often called “socially responsible” stocks and offer a way to support your goals while growing your portfolio. You can also find socially responsible investments in mutual funds and exchange-traded funds.