Stocks—also known as shares—are a fundamental part of many investors’ plans to build wealth. But they can be complicated to understand, and the different types of stocks have their own unique benefits and risks.
A share of stock represents a fractional ownership in a company. It’s an investment that can grow over time if the company does well and you decide to sell your shares. It can also provide a steady source of income (dividends) if the company’s management chooses to pay them out. Stocks are traded on a free market, called a stock exchangeOpens Dialog, and their value is set by supply and demand. The price of a stock may rise or fall over the short term, depending on a variety of factors, including news events and investor sentiment.
If a public company issues shares and lists them on a stock exchange, they become easily accessible to everyday investors. This can help companies raise money quickly and efficiently, but it also opens them up to more regulation. This includes disclosure requirements to make sure that investors are informed about a company’s finances. It also means that a company’s stock prices can be affected by the market, even if the company hasn’t done anything wrong.
Stocks are the best way for a person to invest in a business—especially if they’re willing to take on some risk and have a long-term investment horizon. However, they carry the potential for higher losses than other investments and can be volatile.
As a rule, stocks offer the greatest opportunity for growth over the long run, but they are subject to price fluctuations that can be caused by world events, economic conditions, and public sentiment that’s unrelated to the company. Historically, people who hold stocks for long periods of time have been rewarded for their patience and diligence, but that’s not necessarily true for everyone.
There are different ways to categorize stocks, but most often they’re divided based on the size of a company, or its market capitalization. Larger companies tend to have more stable stock prices, while smaller companies are more volatile. Stocks are also categorized by whether they pay dividends, or give shareholders a portion of a company’s profits. Some companies, especially younger ones, don’t pay dividends and instead reinvest their profits in hopes of growing faster.
If you’re interested in learning more about the benefits of investing in stocks, Edward Jones can help. Talk with one of our financial advisors today to learn more about your options and what kind of portfolio is right for you.