Stocks have long been a cornerstone of many investment portfolios, offering higher growth potential than other options like bonds. However, stocks also come with their own unique set of risks that can be important to understand before you decide how much to allocate to this type of investment.
A stock is a share of ownership in a publicly-traded company that represents a claim on the company’s earnings and assets. As a shareholder, you have the right to receive dividends (shares of profit) and can benefit from price appreciation (if the share value rises). Shares are traded on the public market through stock exchanges such as the New York Stock Exchange or Nasdaq. In recent years, it’s become easier for individual investors to access and purchase shares through online brokerage accounts. This has made stocks a popular choice for people looking to build their investment portfolios without the need for extensive financial expertise.
One of the main advantages of stocks is their strong correlation with overall economic growth. As the economy thrives, companies’ revenues and profits typically grow, leading to a rising share price for their stock. This growth gives you the opportunity to have your investments grow in tandem with the economy, allowing you to potentially generate stronger long-term returns than other types of investments, such as cash or bonds.
On the other hand, stock prices can fluctuate for a variety of reasons, including overall market volatility and unforeseen events that may impact a specific company’s profitability. These changes in share prices can leave you with a loss on your investment, depending on how much you invested and when you sell.
Because of these risks, it’s crucial to diversify your portfolio by including a variety of stocks from different industries. You can do this by purchasing stocks in large-cap companies, mid-cap companies, and small-cap companies. You can even invest in microcap stocks, which are shares of very small companies that don’t produce significant revenue or profit.
You can also diversify your stocks by focusing on different sectors, such as health care or technology. There are also a number of stock options that offer international exposure, giving you the potential to expand your global investing horizons.
Lastly, it’s worth considering the tax benefits that can be attached to your investments in stocks. Depending on your investment goals, you may be interested in receiving quarterly dividend payments and/or tax-efficient capital gains when you sell your shares.
The stock market has historically been considered the heart of a country’s economy. Today, this sentiment has continued to grow as financial markets have become more central to the day-to-day lives of millions of Americans. Because of this, governments and central banks often feel more obligated to step in during periods of peril when the savings of a broad swath of the population are at risk. This is called “financialization” and it’s a part of why the economy, including stock markets, can be so sensitive to external forces.