Stocks play an important role in many investment portfolios, especially those with long-term goals. They have a historical track record of providing higher returns than bonds or cash alternatives. However, stocks do carry a greater risk than mutual funds or bonds and can be more volatile in the short term. If you are considering adding stocks to your portfolio, be sure to consider the potential trade-offs and speak with a financial advisor to ensure it fits with your overall investing plan.
A stock is a share of ownership in a public company. Companies issue shares to raise money for expenses, such as designing new products, hiring employees and expanding into new markets. Investors purchase the shares and hope that the company grows enough to make a profit, which could eventually be realized when the company sells its stock for more than it paid to buy it. A company may also pay dividends to shareholders, though not all do. The amount of the dividend is based on the company’s earnings, and it is not guaranteed.
When evaluating a stock, it is important to look at the company’s financial health and operational capabilities, as well as the industry in which it operates. But the most important factor is whether the stock’s price reflects its true value. It is not uncommon for the market to over- or undervalue a company, and it’s up to you to determine whether a particular stock is a good value.
The price of a stock is determined by supply and demand, as well as market sentiment and economic conditions. The price of a stock can change dramatically, and it’s not unusual to see large swings in value over the course of just one day. This is why it’s so important to have a long-term investment horizon when owning stocks.
Buying and selling stocks should not be driven by emotions, such as greed or fear. It’s important to stick with your investment strategy and focus on the fundamentals, such as a company’s business model, its competitive advantage, management expertise and product quality.
Stocks can offer tax advantages, including qualified dividends that are typically taxed at a lower rate than ordinary income taxes in nonqualified accounts. They can also provide diversification, reducing the volatility of a portfolio and helping to protect against a prolonged decline in the market.
The key to success when owning stocks is understanding that it’s not just about the company’s current and projected performance, but also where it’s heading in the future. Companies with solid fundamentals can grow their value, and their stock prices follow suit over the long run. The trick is to identify the ones with the strongest potential and have a plan for them within your investment portfolio. Contact your Edward Jones financial advisor for more information about how stocks can fit into your financial picture. We can help you develop a comprehensive wealth plan that incorporates stocks, as well as other investment options.