Shares in a company represent fractional ownership of that corporation and provide the opportunity for investors to participate in profits. Stocks can grow in value through price appreciation and dividend payments.
Many people use stocks to help meet savings goals like retirement or educational expenses, and they can play a role in helping a portfolio diversify. However, they are not without risk. In fact, the stock market is known for its volatility and the potential for sudden declines in price. That’s why it’s important to understand the risks associated with stocks before you invest.
Investors buy and sell stocks in a market called a stock exchange. These markets—like the New York Stock Exchange and Nasdaq—are central locations where investors can buy and sell shares of publicly-traded companies. There are also several other exchanges around the world. Stocks are often called equities or securities, but a stock is technically the same thing as any other type of financial instrument that you would purchase through a broker.
Stocks generally offer higher growth potential than bonds or cash alternatives, but that doesn’t mean they can’t lose value. Markets can be volatile and prices may rise or fall for a number of reasons, including economic events, company performance, or even global crises.
The key to successful investing is to make a long-term plan and stick with it. A diversified portfolio of stocks, including foreign and domestic equities, can help mitigate market volatility by spreading risk across different sectors. A well-diversified portfolio can also help to reduce investment costs.
When you buy a share of common stock, you become a part owner in the company and may have voting rights at shareholder meetings. In addition, some companies pay dividends on a regular basis to common stock shareholders as a share of their profits. Common stockholders can receive dividend payments or reinvest them in the company to generate additional income.
Before you start investing in stocks, it’s helpful to have a clear understanding of your investing goals and your current financial situation. This will help you determine your risk tolerance and how much you can afford to lose if the value of your stocks decreases.
In addition to your own goals, you should consider the amount of assets you have on hand and how much debt you’re carrying. It’s usually best to limit your exposure to stocks if you have significant amounts of high-interest debt, such as credit card debt.
You can invest in individual stocks, or you can invest in mutual funds or exchange-traded funds (ETFs) that buy multiple stocks with one transaction. These can provide instant diversification and may help reduce fees. Ultimately, the goal is to create a portfolio that meets your specific needs. Your financial professional can help you develop a comprehensive financial plan that includes an appropriate allocation to stocks for your long-term objectives, and they can recommend strategies to minimize market volatility.