There are a lot of ways to invest your money. You could buy real estate, invest in bonds, start a small business or collect precious coins. But one of the most common options is to buy stocks, which represent partial ownership stakes in publicly traded companies. These investments can be a valuable part of a well-rounded portfolio, as long as you understand how they work.
Let’s look at the basics of stocks to get a better understanding. Stocks, also known as equities, are shares in a public company that can be bought and sold on the stock market. A single share represents fractional ownership of the corporation, and owners—known as shareholders—are entitled to a proportional cut of the company’s earnings and assets. Companies issue stock to raise capital, and investors who think the company’s future will be brighter than its past typically purchase those shares in order to reap the benefits of that growth.
Stocks can be a great way to participate in a company’s growth, and over the longer term they have historically provided higher rates of return than other investments. But over shorter periods of time, the value of a particular stock can fluctuate based on a variety of factors that have little to do with the actual performance of the business. The overall economy, interest rates and investor sentiment are just a few of the many influences that can affect the price of a stock over a short period of time.
In the long run, however, the value of a stock generally rises as a business grows its sales and profits. This is why so many careful investors build diversified portfolios that include stocks in a wide range of industries and geographic markets.
Investors can benefit from a company’s success in two ways: dividends and price appreciation. A dividend is a cash payment that the company’s shareholders receive on a regular basis, typically once per quarter. Price appreciation occurs when the company’s stock price rises above the price at which it was purchased.
If a company is paying out a regular dividend to its shareholders, it’s likely that its future prospects are positive. If it isn’t, the company may be facing challenges that could cause its stock to drop in value.
It’s important to keep in mind that not all stocks are created equal, and there is a lot of research to be done before buying a stock. This is why it can be so helpful to have a financial professional in your corner who can help you make sound investing decisions and stay on track with your investment goals.
If you’d like to discuss how stocks can fit into your overall financial plan, reach out for a complimentary consultation with an Edward Jones advisor near you. Or open a new account at Robinhood to get started with stock investing on us. No minimum deposit required. Not an Edward Jones client? We’d love to hear from you.