Stocks — sometimes called equities — are a staple of almost every investment portfolio. But they’re often misunderstood. A share of a stock represents fractional ownership of a publicly traded company, and the higher the number of shares you own, the more equity you have in the company. Corporations issue shares to raise money for growth, and when their value goes up, shareholders reap the profits. But stocks aren’t without risk, and the key to minimizing that risk is diversification.
In addition to being a key component of any investment portfolio, stocks can also play an important role in helping you save for retirement. They’re a long-term investment with a track record of high returns when compared to bonds. However, stocks can be volatile, and a decline in the market could leave you with less money than if you’d invested in other assets.
The term “stock” can mean different things, and understanding the various types of stocks is vital to investing wisely. There are some common terms you may hear when referencing a stock, including capitalization and dividends. Capitalization is a measure of the total market value of a publicly-traded company, and it’s used to rank companies based on their size. This is a key piece of information when considering investments, as it can provide insight into the potential future return of your shares.
A company can grow its value by issuing new shares of stock or repurchasing existing shares, which helps it raise funds to pay for expenses and expand operations. Investors buy and sell these shares on a stock exchange, such as the New York Stock Exchange or Nasdaq. When a company’s value increases, so does its stock price, which is why many investors choose to invest in stocks for the potential of higher returns over time.
Companies may also distribute earnings to shareholders in the form of dividends, which can be paid monthly, quarterly or annually. This is known as income investing, and it’s one way you can receive a steady stream of money from your investments. It’s important to remember that owning shares in a company doesn’t give you any sort of influence over its decisions or a parking spot in the corporate lot. However, it does mean you get a share of the profits and losses, which is why investors should always keep in mind their goals when choosing stocks.
Stock prices can fluctuate for a number of reasons, from overall market volatility to specific events, such as a communications crisis or product recall. That’s why it’s important to consider your investment goals when choosing stocks, and make sure you diversify your holdings across the spectrum of large-cap, mid-cap and small-cap stocks. This helps to balance your exposure to risk and can help you achieve the long-term returns you’re looking for.