Stocks are partial ownership of a business and give you a claim on earnings and assets. Ideally, stocks increase in value over time so that you can sell them for a profit. But stocks also go down in value, so it’s important to keep your expectations realistic and diversify your portfolio.
Stocks represent a risky investment, and many people don’t invest because they’re afraid of the volatile market and low returns. But investing in stocks is one of the best ways to grow your money and outpace inflation over time. Stocks can provide a return that’s higher than savings accounts or cash alternatives, and they can help you reach financial goals like retirement.
A company issues shares of stock to raise capital to design new products, hire employees and expand into new markets. Companies may also need to pay off debt or buy back stock in order to boost their profits. Purchasing shares of stock gives you a stake in the company’s future, and the company’s board of directors manages its day-to-day operations on behalf of the shareholders.
In addition to the potential for price appreciation, stocks can pay dividends. A company distributes dividend payments out of its earnings, and these payments are typically paid quarterly. Some stocks are sold at a discount, meaning that you can purchase a share for less than its current market price.
As a shareholder, you can also vote on the company’s management and direction at shareholder meetings. While some investors choose to buy and sell individual stocks, others purchase a collection of stocks through a mutual fund or exchange-traded fund (ETF). Stocks are usually bought and sold on a public exchange, such as the New York Stock Exchange or Nasdaq.
Investor demand typically drives stock prices, and this demand can be influenced by the overall economy or company news. If a company launches a popular new product, for example, the stock price might rise because investors want to be the first to own it. On the other hand, if a company is rocked by scandal or faces challenges from competitors, its stock may fall.
Other factors that can impact stock prices include macroeconomic trends, such as interest rate changes or unemployment, as well as natural disasters and wars. Investors should diversify their investments by holding stocks in a wide range of industries to mitigate the risk that any particular sector or country will experience economic volatility.
You can build a portfolio of stocks through online brokerages and robo-advisors, or you can invest in a mutual fund that holds many stocks across the market. Whether you choose individual stocks or an ETF, you can use NerdWallet’s free ratings to compare online brokers and robo-advisors based on account fees and minimums, investment choices and mobile app capabilities.