Stocks are a cornerstone of a well-diversified portfolio because they provide higher return potential than bonds, cash and real estate. However, stocks are not guaranteed to increase in value, and it is possible for them to decline — sometimes significantly. That’s why it’s important to do your homework and understand the factors that influence stock prices.
A share of stock represents partial ownership in a company. Companies issue shares in order to raise money and grow their business. Many companies also pay dividends, or a portion of their profits, to shareholders. These quarterly dividend payments can supplement a retirement income stream.
While nothing is guaranteed in investing, stocks have generally outperformed bonds, gold and real estate over the long term. However, a well-diversified portfolio can help reduce the risks of volatile markets.
The word “stock” is actually an old English word that means “share” or “part ownership.” The stock market is the public marketplace where stocks are bought and sold. There are a variety of ways to invest in the stock market, from individual shares of individual companies to mutual funds or exchange-traded funds that hold stocks.
Most of these investments are made through a brokerage account, and are traded on a public exchange like the New York Stock Exchange (NYSE). This makes it easy for people to buy or sell shares at any time. The stocks in the market are grouped by sector, and the most common sectors are utilities, consumer staples and healthcare.
Investors are constantly looking for opportunities to make more money, and one of the best ways is to find stocks that are selling for less than they should be. Using valuation methods, such as price-to-earnings ratios, is a good way to see if a stock is cheap or expensive.
Using these methods can help you avoid buying overpriced stocks and save a lot of money. In addition to valuing a stock against similar companies, it is also a good idea to consider macroeconomic trends when making investment decisions. For example, a low-volatility stock is often considered a safe bet because it tends to hold its value during times of economic uncertainty. Examples of these types of stocks include Johnson & Johnson, Coca-Cola and Hershey.
If you’re considering adding a portion of your investment dollars to the stock market, start by creating a comprehensive financial plan. That plan should reflect your investment horizon, and the level of risk you’re comfortable taking. Then, determine how much of your portfolio should be allocated to stocks. It’s also important to diversify your investments by purchasing a mix of large-cap, small-cap and international stocks. This will help mitigate the impact of a downturn in any particular sector.