Stocks—or shares—are an essential part of many investors’ plans to grow wealth. Investing in stocks can help you build wealth over time by increasing the value of your investments, which you can then sell for more than you paid for them.
However, stocks also carry more risk than some other investment types. So, it’s important to understand the potential for losses as well as gains when investing in stocks.
The word “stock” has several different meanings, including an ownership stake in a company or even the entire market. But the term typically refers to the shares of publicly-traded companies that are bought and sold on exchanges like the New York Stock Exchange or Nasdaq.
When a company issues stocks to investors, they can use those funds to expand their businesses by hiring more employees or creating new products. Over time, they hope those expanded operations lead to increased profits and a higher share price—at which point investors can sell their stocks for more than they bought them for.
Stock markets are known for their volatility, as the prices of stocks can fluctuate based on everything from economic conditions to global crises. This unpredictability can be nerve-wracking for investors, especially if they have a low tolerance for loss. However, if you’re willing to hold onto your stocks for the long haul—and diversify your portfolio with other asset classes to reduce the risk of a large loss—stocks can offer high returns over the long term.
There are three main types of stocks: common, preferred and debt securities. Each has its own unique characteristics and benefits that could make it a good fit for your portfolio.
The fundamental reason why stock prices rise or fall is simple: demand. A company’s stock will attract buyers when it’s trading at a higher price, while stocks that are undervalued will see their prices dip. Investors look at a number of factors when evaluating a stock’s price—including the company’s financial health, industry trends and future growth forecasts, as well as its overall market sector performance.
One of the main advantages of investing in stocks is that they often pay out dividends—a form of profit distribution to shareholders based on a company’s earnings and assets. This income can be a valuable source of revenue for those who invest in multiple stocks, and it may also be used to help offset a decline in the value of your overall portfolio.
Stocks are generally considered to be long-term investments because they tend to experience more ups and downs than other asset classes over the longer term. This can be helpful for reducing the impact of losses during periods when markets are down—although, it’s important to remember that the stock market has seen its fair share of crashes in the past.