Stocks — also known as company shares or equities — are an essential part of many investors’ plans to build wealth. They’re commonly bought and sold through brokerages and investment apps, and their price movements often make headlines. But the complexity of stocks makes it hard to understand exactly what they are and how different types could benefit you as an investor.
Stocks are ownership shares in publicly traded companies. These shares are a way for companies to raise money and invest it in expanding their business, hiring employees or other growth initiatives. The hope is that the investments will grow in value and the company can eventually sell the stocks for more than what they paid to buy them.
Share prices rise and fall based on demand from buyers and sellers, as well as the overall health of the market. As a result, stocks can be more volatile than other types of investments. This can be a good thing, but it’s important to remember that price fluctuations aren’t always positive. A sudden decrease in share prices can result in significant losses for investors if they weren’t prepared for them.
A company’s profits are the foundation of its share value. Each stock represents a portion of those profits, and the more shares you own, the greater your share of the company’s earnings. Many companies, however, choose not to pay out dividends and instead reinvest profits into growing their businesses. Those retained earnings are still reflected in the company’s share value and can help fuel future growth.
The type of stock you own will depend on the company, but there are two main types: common and preferred shares. The type of stock you own will determine whether or not you have voting rights in shareholders’ meetings and how much of the company’s profits you receive in dividend payments. In addition, some companies divide their shares into different share classes so that they can restrict voting rights to certain groups, such as founders or early investors.
There are several advantages to investing in stocks, including their ability to increase in value and the potential for a higher return than other types of investments. They have historically been linked to economic growth, so they can be an attractive option for investors looking to grow their portfolios in tandem with the economy.
Stocks can be a great investment for those with the financial capacity and risk tolerance to hold them over the long term. But stocks can be more volatile than other types of investing and may not be appropriate for all investors. A financial advisor can help you determine if stocks are right for your goals and create an investing strategy that’s aligned with your unique situation.