Stocks are a key part of many portfolios because they provide the potential for growth in tandem with the economy. As a result, stocks have historically offered higher returns than bonds or cash alternatives. However, there is always risk involved with investing in stocks. The key is to make sure you understand the basics and determine your risk tolerance before jumping in feet-first.
When you invest in stocks, you buy a small percentage of ownership in a publicly-traded company. These shares are bought and sold on major stock exchanges, such as the New York Stock Exchange (NYSE) and Nasdaq. The value of a share can increase in two ways: through capital appreciation or dividends. Capital appreciation occurs when the company becomes more profitable, expands or experiences a surge in investor confidence, which can drive the price of the shares up and make it possible to sell them for more than you paid.
This can also occur because of new technology or innovation, which can increase a company’s sales or profits. In addition, companies with a history of paying regular dividends may experience more stable stock prices than those that don’t pay them.
Companies issue stocks to raise money to grow their business operations. Generally, investors can choose to own either common or preferred shares. Common stock holders have voting rights at annual meetings and usually receive dividend payments before preferred shareholders do. Preferred stockholders, on the other hand, have a higher claim on a company’s assets and earnings than common stockholders do. Companies issue shares to attract investors, who then buy them with the hope that their value will rise over time.
The market is a dynamic and volatile place, where stock prices can rise or fall second by second. As a result, it can be emotionally draining to watch your portfolio’s value fluctuate. However, if you’re willing to hold your investments over the long term, you can achieve solid returns.
As a general rule, stocks tend to be more volatile than other asset classes. They can spike up or down in response to a variety of reasons, such as economic events, company news or global crises. But if you stick with your investments and stay invested in the long term, the power of compounding can help your money grow over time.
It’s important to remember that stocks don’t perform well in short periods of time. They can drop significantly in value within a few months, making them a less-than-ideal choice for individuals who want to get in and out of the market frequently. Instead, investors who buy high and sell low over a period of years can generate solid, long-term returns.