Stocks can be a powerful part of an investment portfolio, providing opportunities to grow your money over time and even outpace inflation. But there are also risks, including the possibility of losing money in the short term and taxes. And it’s important to know how to choose individual stocks, which takes time and forethought. By understanding some key questions and applying well-established methods for evaluating companies, you can find a good fit that may help you reach your financial goals.
When you invest in a stock, you’re purchasing a small percentage of a publicly-traded company, such as Apple or Facebook. You can buy and sell shares of those companies on stock exchanges like the New York Stock Exchange or Nasdaq. These investments give you the opportunity to earn returns through two main mechanisms: capital appreciation and dividends. Capital appreciation happens when the value of your shares increase over time, such as when a company becomes more profitable or expands its operations. This is what allows you to sell your shares at a higher price than what you paid for them.
Historically, stock prices have shown a positive correlation to economic growth. This means that if the economy is strong, stocks tend to rise, which provides investors with an opportunity to grow their portfolios at the same rate as the overall market. However, stocks can be volatile, and sudden market downturns can be a nerve-wracking experience for investors. For this reason, stocks are typically only a small part of most investment portfolios.
Stock investing can seem intimidating, especially for individuals who don’t have the time or expertise to do much research and evaluation on their own. That’s why many people choose to invest in mutual funds or exchange-traded funds (ETFs), which pool together the investments of multiple individual investors. This helps them achieve a more diversified portfolio than they could otherwise accomplish on their own. But these investment vehicles can be costly, and they’re not right for everyone.
A stock’s price is influenced by many factors, such as the performance of the broader markets, economic conditions and company news. In addition, the price of a particular stock can be affected by investor psychology, including greed and fear. Fortunately, long-term investing can minimize these effects, and investors who stick with their stocks over the long haul often see impressive returns.
There are many ways to classify stocks, but one popular approach is based on the company’s expected future revenue and earnings. Companies with high revenues and earnings growth are classified as growth stocks, while those with low expectations are called value stocks. There are also sub-categories based on the size of the company, such as large-cap, mid-cap and small-cap stocks. And there are even micro-cap stocks, which are shares in very small businesses that don’t have any revenue or earnings.
Choosing the right individual stocks can be challenging, but with the right guidance and a solid investing plan, it’s possible to build a successful portfolio that can help you reach your financial goals. NerdWallet has an extensive library of resources and tools, including how to choose stocks, to help you make the best decisions for your portfolio. And our expert advisors are always available to help you build a financial plan and invest wisely.