Stocks, company shares, equities—whatever you call them, these investments are a crucial part of many investors’ plans to build wealth. They offer the potential for high returns and portfolio diversification, but also come with risks, including market volatility and the risk of financial loss.
A share of a public company gives you fractional ownership of the company, with your investment’s value reflecting the performance of the business over time. In addition, a number of companies pay dividends—a portion of profits shared with shareholders—which can add to your income. Stocks are a key component of many investor’s long-term growth strategies and can help you grow your savings faster than inflation over the years.
Historically, stocks have outperformed most other investment options. Unlike bonds, which operate like loans that creditors make to a company in return for periodic payments, the value of a stock fluctuates based on economic shifts and investor sentiment. Depending on the type of stock you own, you might also have voting rights to influence decisions affecting the company’s future.
Most stocks trade publicly on a stock exchange, such as the Nasdaq or New York Stock Exchange, and you buy and sell them using a brokerage account. When a company decides to offer its stock for the first time, it’s known as an initial public offering (IPO).
The number of buyers and sellers in the marketplace determines the stock price—which can be driven by factors such as overall market conditions or specific developments in a company’s operations. Stocks typically have indefinite holding periods, which allows you to keep them for as long as you want or need to, though events that could impact the company’s value—like a merger or acquisition, for example—could cause your stock to decline in value.
There are many ways to classify stocks, but one common grouping is by a company’s size, or market capitalization. This distinction can be useful because the larger companies are typically more stable, while small companies can have a higher degree of volatility. Stocks can also be classified by whether they pay a dividend, and if so, on what schedule they make those payments.
Generally speaking, stocks with higher potential return carry more risk than those with lower expected returns. That’s why it’s important to assess your investment horizon and level of risk tolerance before investing in stocks.