Stocks, or equities, are a big part of most people’s investment portfolio. The good news is that a diversified stock portfolio has a history of rising over time, but stocks do experience dramatic dips at times. The best way to reduce your risk of losses is to invest for the long term, and to diversify your stocks. The stock market can be intimidating for beginners, but with the right knowledge and a plan, you can build wealth and reach your retirement goals.
Stocks are a type of security that represents partial ownership in a publicly traded company. The company issues the stock in order to raise money and grow its business, according to the Securities and Exchange Commission (SEC). Stockholders gain when the value of the company rises, as well as when the company pays out dividends, and they can also participate at shareholder meetings. Companies may issue different types of stocks, including common and preferred stock.
When deciding to purchase shares in a company, it’s important to research the industry and individual companies. Carefully examine the regulatory filings, and make sure you understand how a company makes decisions for day-to-day operations. Also, understand the different types of shareholders and classes of shares, and how they may differ in terms of power and influence.
A stock’s price at any given moment is determined by supply and demand. The supply is the total number of shares available to buy at that instant, and the demand is the total number of shares investors want to own. The price moves in order to achieve and maintain equilibrium between the two.
While the word “stock” is commonly used to describe a slice of ownership in a company, it’s also a generic term for any financial instrument that can be bought and sold on an exchange. Investors can own shares in other types of investments, including mutual funds, exchange-traded funds, real estate investment trusts and more.
The stock market’s wild swings can be terrifying for beginners, but over the long term a diversified stock portfolio has historically outperformed other investments like bonds and interest-bearing bank accounts. It can be difficult to know the best time to jump into the market, and no one knows with 100% certainty when the right time will be. However, starting early is key to building wealth over time, and online brokerages have made it easier than ever to open an account.
Arielle O’Loughlin is a retirement and investing expert at NerdWallet, where she’s appeared on the Today Show and other national media. She has a Bachelor’s degree in economics and has been writing about finance for more than 10 years. She is passionate about helping others reach their financial goals, and you can find her on Twitter at @aoloughlin.