Stocks are a core component of any long-term savings plan. They’re often considered one of the best ways to grow your money over time, but their volatility can scare some investors away from making a commitment to investing for the long term. But when properly diversified, stocks can provide a good return on your investment and help you achieve financial goals like retirement.
Stocks, also known as equities, are securities that represent a share of ownership in a public company. Investors buy shares in companies they believe will prosper in the future, hoping to sell them for a profit. The company uses the proceeds from these sales to expand its business and create jobs. The share price fluctuates based on a variety of factors, including the company’s performance, market conditions and investors’ expectations for the future.
In order to raise funds for expansion, companies must issue new shares of stock to the public. This process is called an initial public offering, or IPO. During an IPO, the company and its advisors disclose how many shares will be issued and set an IPO price. The company then begins to trade its shares on the secondary markets, which are collectively known as the stock market. When you buy a share of stock, you own a part of the company and have voting rights. You may also receive dividends, which are distributions of the company’s profits to shareholders.
When companies do well, their share prices go up. This is because investors who bought the stock in its early days are rewarded for their confidence in the company’s ability to make good products and hire skilled workers. But even the most promising companies can experience downturns, which can cause a drop in share prices and a loss of money for shareholders.
Investors can diversify their portfolio by buying different types of stocks in different sectors to mitigate risk. Some of these sector categories include technology, health care and consumer goods. Each has its own advantages and risks, and some investors find it beneficial to focus on a particular sector or industry when building their portfolios.
While investing in stocks can be risky, the stock market has a long history of providing high returns on your investments. Over the long term, a portfolio of stocks has historically returned between 8% and 9% annually after accounting for inflation.
If you want to start investing in stocks, the first thing you need is a brokerage account. You can open one through an online broker or robo-advisor, which connects you to a stock exchange where you can buy and sell shares of a company’s stock. When choosing a broker, NerdWallet recommends looking at a number of criteria, including account fees and minimums, investment choices, customer support and mobile app capabilities. You can compare top investment brokers side-by-side using our ratings.