A fundamental part of many investors’ portfolios, stocks (also known as shares or equities) represent partial ownership in public companies. While they have historically offered significant growth potential, they do carry a greater degree of risk than bonds and other fixed income investments. This is why careful investors keep their risk tolerance and capacity in mind when choosing stocks, as well as how they may diversify their stock exposure to reduce their overall investment risk.
The main benefit of owning stocks is that as companies grow and become more profitable, their stock price rises. This provides a great opportunity for savvy investors to generate strong capital gains over the long haul, which can help increase their portfolio’s overall value. However, it’s important to note that historically stocks have not always correlated with overall economic growth, and the price of any individual stock can rise or fall at any time.
In general, there are many factors that affect the performance of a stock, including overall market volatility and a company’s financial condition. Investor sentiment can also play a large role, with a positive perception of a company’s future prospects often driving its share price up. A negative perception, on the other hand, can cause a stock’s price to plummet.
There are a number of ways to categorize stocks, including their market capitalization and sector. For example, a company’s stock can be classified as “large-cap,” “mid-cap,” or “small-cap.” In addition, companies can be grouped into sectors like information technology, health care, and energy. Different industries typically respond differently to changes in the economy, and as such, careful investors try not to get too concentrated in any particular sector.
Stocks can be analyzed using a variety of methods, and investors often divide into one of two camps: fundamental or technical analysis. While fundamental analysis tends to focus on a company’s financial performance and business model, technical analysis uses charting and other tools to identify trends in price movements.
Aside from the benefits of capital appreciation and dividends, stocks can provide tax advantages. For instance, qualified dividends are taxed at a lower rate than ordinary income in non-qualified accounts. In addition, the sale of stocks in a taxable account can be taxed at a capital gain rate rather than a regular income rate.
In most cases, you’ll buy and sell stocks through a brokerage account. When buying or selling stocks, you’ll submit a stock order to your broker that details what you want to buy or sell and at what price. Some orders are executed immediately while others take longer, depending on whether or not you’re waiting for a stock to reach a certain price before placing your order.
Lastly, you can also choose to invest in companies that pay dividends to shareholders. While not all companies pay dividends, those that do typically distribute them at least quarterly. While these payments don’t have the potential to increase your portfolio’s value as much as capital gains, they can offer a steady source of income.