Stocks represent a fractional ownership stake in a publicly-traded company, granting investors a partial share of the company’s profits and growth. As a primary component of many portfolios, stocks are a powerful tool for wealth building over time and are one of the best ways to diversify a portfolio’s risk exposure. However, it’s important to understand how stocks work and how they differ from other investments before deciding to allocate any of your hard-earned savings to the markets.
In the past, stocks have returned about 7% per year, adjusted for inflation. This historical return has been far better than the returns on fixed-income investments like bonds, which have historically returned about 4.7% per year. This historical return is a great reason to consider adding stocks to your investment portfolio. However, before investing in the stock market, it’s important to develop a comprehensive financial plan that reflects your investment horizon and the amount of risk you can stomach to ride out the ups and downs of the markets.
When you buy shares of stock, you become a shareholder of the company that issues them. This entitles you to benefits, such as voting rights and annual learning reports. In addition, most companies will pay dividends to shareholders on a regular basis, which is a portion of the company’s profits.
Purchasing shares of stock gives you the ability to share in the success of some of the world’s most successful companies. But you should know that stocks are considered long-term investments, and that a well-diversified portfolio is the key to protecting yourself from large losses.
Companies raise funds to grow and expand by selling shares of stock to investors. They do this through an initial public offering (IPO) or by selling their stock in the secondary market on the exchanges. More than 58,000 public companies trade on the exchanges today.
The value of a share of stock rises and falls second by second, but over the long term, stocks have outperformed fixed-income investments. In fact, the S&P 500 has returned an average of about 7% per year over the last 50 years.
Investors must be prepared for volatile markets and are encouraged to diversify their portfolio with other types of investments, such as bonds and real estate, to protect themselves from high levels of risk. When the stock market experiences a dramatic decline, it can be tempting to sell at low prices. However, investors should remember that a company’s stock price has to recover before the company can start making money again.
Before investing in stocks, be sure to fully research the company you’re considering and read through its annual learning report. Understand the business model, how it makes money, and how its products or services are changing the world. Then you’ll be ready to make an informed decision about how many shares of the company you want to purchase. Depending on your individual situation, you may want to consult with a qualified professional or a reputable investing site to learn more about the company and the markets.