Stocks are a key part of the financial markets. When you buy shares of a company, you become a partial owner, and your share of the company’s earnings and assets rise or fall as the business grows or shrinks. This is called capital appreciation. Stocks can help you build wealth, but they also come with risks that you should carefully consider.
Whether you invest in stocks by purchasing them individually or through an index fund, it’s important to understand what you’re investing in. You can learn about the three main types of stocks and how they work within a portfolio, and find out more about the benefits and drawbacks of stocks.
The stock market, also referred to as the equity market or capital market, is a public market for the trading of corporate ownership shares. These shares represent a claim on the company’s earnings and assets, and allow shareholders to participate in the growth of the business. The prices of different stocks rise or fall throughout the day on the exchanges. Investors who sell their shares at a higher price than they bought them for make money. The stock market has been around for over 200 years, and it is the foundation of most modern economies.
A stock’s value is affected by a variety of factors, including the company’s current and projected earnings, economic conditions, government policies, and other investors. Generally, a stock’s price rises when demand for the company’s products or services increases, and falls when demand decreases. Companies may also pay dividends, which are periodic payments to shareholders out of the company’s revenue. The value of a company’s stock may also be impacted by the perception that the economy is growing or contracting.
Stocks can provide a solid return for long-term investors who are willing to stick with them through good and bad economic times. However, they’re not suitable for all investors. If you need your investments to be liquid within a few years, for example to purchase a home or other large item, you might want to invest in other asset classes such as real estate or bonds.
Many people avoid investing in stocks because they fear they’ll lose money when the market is falling. But studies show that it’s much more likely that a recession will occur shortly after a stock market peak, and stocks recover from declines quickly. In fact, thirty-nine of the forty-two recessions that have occurred since 1802 were preceded by or accompanied by stock market declines of at least 10%.