Known as stocks, company shares, or equities, these are a core component of most investment portfolios. A stock represents a share in the ownership of a business, including a claim on its earnings and assets. As such, the value of a stock is influenced by the performance of the company and can also be affected by market volatility or specific events that impact a particular sector or industry.
While stocks have a long history of high returns, it’s important to remember that they come with risk. That’s why it’s best to think of stocks as long-term investments, and to build a well-diversified portfolio to help offset the potential for short-term losses.
Companies begin to issue stocks through a process called an initial public offering (IPO). Once the stock is listed on a national exchange, it can be bought and sold among investors. Investors can buy shares directly from a company or through a broker, such as Schwab.
A company’s shares can grow in value through price appreciation, and they may also pay dividends to shareholders. While dividends are not guaranteed, they can offer a source of income. The amount of the dividends will depend on the company’s profits and can vary from year to year.
As a result of the possibility of capital gains and dividend payments, stocks can provide higher yields than other asset classes. They can also serve as a hedge against inflation, which can erode the purchasing power of an investment over time.
There are several different ways to categorize stocks, including by size (large-cap, mid-cap, small-cap), and by the industry or geographic sector in which they operate. In addition, some stocks are considered speculative and don’t pay dividends, while others are rated as low-risk or even safe by some market observers.
Investors may choose to invest in a variety of different types of stocks, and many are part of a wider portfolio of assets that includes bonds, real estate, and cash. This diversification can help reduce the overall risk of a portfolio and improve its long-term performance.
While some individuals choose to invest in stocks through a 401(k) plan offered by their employer, most use a brokerage account to purchase and sell individual shares of a company. This means that these investors need to have a solid understanding of how stocks work and the risks involved in their trading.