Stocks, also known as equities, give you fractional ownership of a public company and the right to receive any dividends or profits that a business generates. While stocks can be a lucrative long-term investment, they’re not without risk and should only make up a portion of your overall portfolio.
While the price of a company’s shares fluctuate daily, the overall average return on stocks is about 10 percent over the long term, according to the S&P 500 index of the 500 largest U.S. companies. That’s before accounting for inflation, which eats into the value of money over time.
A stock’s price in the market reflects how many shares are available to be bought and sold, as well as the company’s prospects for future growth. A growing company with strong sales and profits is likely to see its stock rise, while a struggling company may experience a drop.
Individual investors can buy and sell their shares on a stock exchange, where buyers and sellers can negotiate prices to determine the best sale or purchase price for each share at any given time. The stock market distributes control of some of the world’s largest companies among hundreds of millions of individual investors, who together determine the value of these firms.
Stocks are one of the most common tools for individuals to grow their savings and build wealth, particularly as they prepare for retirement and other long-term financial goals. Investors often use different stocks in various industries to diversify their portfolio, which helps mitigate risks as different sectors of the economy thrive at different times.
The best way to invest in stocks is by regularly purchasing shares in a diverse collection of companies and reinvesting the proceeds. This is a good strategy for people who don’t want to spend all of their spare time studying market trends, but who still want to be able to enjoy the benefits of investing over the long term.
Investors can also diversify their portfolio by buying a mix of stocks in both large and small companies, as well as across a wide variety of industries. This can help mitigate risks as different sectors of the economy thrive or falter at different times.
Some investors prefer to get more income from their investments by acquiring stocks that pay out dividends, but not all companies offer this option. Many younger, fast-growing companies, for example, choose not to pay out dividends and instead reinvest all of their profits back into the company with the hope that it will grow further in the future, driving up its share price and its overall value. For this reason, it’s important to ask yourself why you’re investing in the first place — that can help you avoid falling prey to a short-term trading mentality and ensure that you’re in it for the long haul.