Stocks play a key role in many investment portfolios. But if you’re new to investing, talking about stocks can feel like listening to an entirely different language. Fortunately, this article helps make it easier to understand what a stock is and how stocks work so you can incorporate them into your portfolio as part of your overall financial plan.
A stock is a small percentage ownership stake in a publicly-traded company. Shares of a stock represent a claim on the company’s earnings and assets, which is why they can rise or fall in value. The value of a stock can be measured in many ways, including by dividing the market price per share by a company’s earnings per share. This measurement is known as a company’s Price to Earnings ratio.
Investing in stocks provides the opportunity to participate in the growth of companies, as well as receive dividends. Historically, stocks have shown a strong correlation with the economy’s performance, which can offer the potential for growth in your overall investment portfolio. It’s important to remember, though, that stocks can also lose value in the short term. That’s why it’s best to think about them as a long-term investment.
There are several types of stocks, which can be broken down further based on the size of the company. The largest companies are known as large-cap stocks, and smaller companies are called mid-cap or small-cap stocks. The lowest-priced stocks are called penny stocks, and they often don’t pay dividends or have a P/E ratio. These stocks are considered more speculative than other types of shares.
Some stocks can carry special features, such as voting rights or priority over other classes of shareholders in the case of liquidation. In general, however, most stocks are simply common shares.
Generally speaking, stocks are bought and sold electronically through the major stock exchanges such as the New York Stock Exchange and Nasdaq. Depending on the type of stocks purchased, they can be held individually or in mutual funds and ETFs.
While stocks can provide a high return over the long term, they have more volatility than other types of investments such as mutual funds and bonds. That’s why it’s important to have a well-rounded portfolio with other types of investments, and to talk to your advisor about how you can include stocks in your investment strategy.
Before you can begin investing in stocks, you’ll need to establish your risk tolerance and understand your financial goals. If you’re not ready to invest in stocks, it may be helpful to consider paying down debt first or creating an emergency savings fund. Then, you can take the time to research the options that are best suited to your situation. To get started, contact us to set up a consultation with one of our advisors. They can help you develop a comprehensive financial plan to support your goals and meet your investment objectives.