Stocks are a basic building block of many investment portfolios. Although they can be volatile, for those willing to stick with them over the long term, stocks have historically delivered strong returns.
A stock represents a tiny slice of ownership in a company that produces and sells products or services. It’s different from a bond, which operates like a loan made by creditors to a company in return for periodic payments. Companies issue stock to raise money, which they then invest in hopes of increasing the company’s value. Stock prices fluctuate on a daily basis, driven by everything from general market volatility to news events impacting the specific company. The fields of fundamental analysis and technical analysis attempt to understand the underlying reasons for price fluctuations, and predict future stock prices.
The value of a company’s stock is determined by its ability to generate cash flows over the long-term. That’s a big task for most companies, which is why most analysts look at things such as customer satisfaction, growth rates, and technology advantages, among others.
There are many ways to categorize stocks, such as by size – large-cap, mid-cap, and small-cap. The very lowest priced stocks are often called “penny” stocks, which may or not pay dividends and can be highly speculative. Companies also often split their stock into different classes, such as common and preferred stock that offer differing rights of ownership.
Investors use stocks to grow their wealth, and to plan for financial goals such as retirement and education savings. It’s important to remember, though, that stocks can be volatile and may decline in value. This is why many investors choose to diversify their investments by buying stocks in a variety of companies and industries.
Stocks provide an opportunity for higher returns than other investments such as bonds. However, there is also a chance that they could lose all of their value, so they should be considered one of the riskier investments available. It is recommended that individuals not put all of their savings into stocks, but instead, save the amount that they think they will need in the short-term, and then invest that in other assets such as bonds or real estate.
Unlike owning real estate, which requires constant management to maintain property values and avoid costly repairs, stocks are very easy to track and manage. There are many different brokerage firms that offer low fees for managing your stock portfolio, and you can even choose to self-manage your own stocks through online trading platforms.
If you have money that you won’t need in the near future, you should consider investing it in stocks because they are one of the best tools for growing your wealth and outpacing inflation. However, it’s important to be aware of the risks and fluctuations that come with stocks, so be sure to consult your Edward Jones financial advisor before making any decisions.