Stocks, company shares or equities are a cornerstone of many portfolios and offer investors a long-term track record of higher returns than bonds and savings accounts. But stocks also carry more risks than other asset classes and can be volatile, so it’s important to understand the benefits and risks before adding them to your portfolio.
A stock represents partial ownership of a company, including a claim on the company’s earnings and assets. Companies issue stock to raise capital from investors and use the proceeds to expand business operations. Different types of stocks, such as common and preferred shares, offer shareholders different rights and benefits.
Shares in publicly traded companies can be bought and sold on a public exchange, such as the New York Stock Exchange (NYSE) or National Association of Securities Dealers Automated Quotation System (NASDAQ). Stock prices are determined by supply and demand. When the demand for a stock is high, the price rises; when the demand decreases, the price falls. The price of a stock can be further complicated by other factors, such as the size of the company (measured by market capitalization) and investor sentiment.
As such, stocks can provide a greater potential for growth than other asset classes—although the stock market has experienced significant volatility and a number of crashes over the years. For this reason, many investors view stocks as long-term investments, and are willing to ride out some volatility over a period of several years or decades in order to generate a higher return than they would get from saving money in a bank account or other forms of cash.
Besides higher return potential, other benefits of investing in stocks include the opportunity to diversify your portfolio and participate in a company’s success. If a company does well, its stock price will rise, which can help your portfolio grow and offset inflation over time. In addition, dividends paid to shareholders are an excellent source of income and can supplement your investment returns.
Finally, stocks are a vital part of the modern economy and serve as a barometer for overall economic health. The stock market has become central to the modern global economy, a change driven by financialization—the increasing dominance of finance and financial markets over other parts of the economy. As a result, the stock market has become an integral part of millions of Americans’ retirement and investing strategies.