Investing in stocks—also known as company shares or equities—is an important part of many people’s financial plan. But just because stocks are a common investment vehicle, it doesn’t mean that they’re easy to understand. Here are a few things you should know before starting to invest in stocks.
A stock is a share of ownership in a publicly-traded corporation. Companies issue shares to raise money and allow ordinary investors to get a piece of the profits and growth potential of the company. Public companies are listed on a number of exchanges, like the New York Stock Exchange (NYSE) or Nasdaq, which allows ordinary people to buy and sell shares of the company. By being public, companies are also more transparent and subject to increased regulation from the Securities and Exchange Commission (SEC).
The price of a stock fluctuates up or down based on supply and demand in the market, as well as other factors, such as market trends, economic forecasts, government policies, natural disasters, and investor sentiment. Over the long term, a company’s sales and earnings will probably increase, which will likely lead to an appreciation of its stock prices.
But it’s important to remember that, as a general rule, large companies have lost money on average about one out of three years. Stocks offer higher returns than other investments, such as savings accounts or bonds, but they come with a greater degree of risk. If you own a large number of shares in a company, then your money will follow the stock’s movements—and that can be both exhilarating and nerve-wracking.
It’s also important to recognize that stocks are not a guaranteed way to grow your money, and that investing is not something you do just for the short-term. Investing should be seen as a long-term activity, and it’s important to divorce yourself from the daily news cycle—otherwise, you’ll constantly be changing your strategy in response to the latest headlines.
You can use different methods to invest in stocks, but one of the most popular is through your employer’s retirement plan, such as a 401(k) (private employers), a 403(b) (government agencies and nonprofit organizations), or a 457 (state and local government employees). By contributing a portion of each paycheck, you can build wealth over time—and reap tax benefits as you do so.
But, before you start putting away money into your employer’s retirement plan, consider how much you have to invest and what your goals are for your own finances. Doing the research now will help you set yourself up for success down the road. This article will guide you through the basics of stocks so that you’re ready to start building a successful portfolio. By making smart choices, you can achieve the financial future that you’ve always wanted. Good luck!