Stocks, company shares, equities—whatever you call them, they’re a crucial part of many people’s plans for building wealth. But they can also be confusing to someone who isn’t familiar with how they work and the benefits they offer. So, we’re here to help you understand what stocks are and how they can benefit your portfolio.
The stock market is where public companies sell shares of their ownership to investors in exchange for money. These shares give the investor a fractional share in the corporation’s assets and profits, and they are sold primarily on stock exchanges. The value of the shares fluctuates constantly, and investors can buy low and sell high, or they can hold onto their stocks for longer periods of time to see the long-term benefits of their growth potential.
While it’s important for new investors to understand that the stock market can be risky, there are a few advantages that stocks bring to your portfolio:
A growing economy and strong business performance often boosts the value of stocks, since these factors increase the size of the public corporations that issue them. In addition, a company’s successful performance can boost the revenue and profits of its shareholders, and that can lead to higher dividend payments and capital gains from the sale of shares.
The value of a stock can be affected by a number of other factors, including overall market volatility and news that may impact a specific company. If, for example, a competitor releases a similar product that could hurt sales, the price of a company’s stock can fall. Conversely, good financial news can send a stock’s price skyrocketing.
Another key benefit of stocks is that they tend to offer higher average rates of return than most other investments, such as bonds. However, over shorter periods of time (weeks or months), the prices of individual stocks can change based on a number of factors, both global and local.
In addition to dividends, stocks can be tax efficient for investors who own them in non-qualified accounts. This is because dividends are taxed at a lower rate than ordinary income taxes.
Different types of stocks can be grouped into categories based on their total value, which is called the “capitalization.” For example, you might hear reference to large-cap, mid-cap, and small-cap stocks. But, the lines between these categories can be a little fuzzy because some companies grow much faster than others, and those differences can be reflected in the overall cap values of their stocks.
Stocks have a long history of providing higher returns than other investment options, such as real estate or cash. But, they can still be volatile in the short term and are generally a more risky type of asset than many other types of investments, such as bonds. So, it’s important to have other types of investments in your portfolio to mitigate those risks. A well-diversified portfolio that includes stocks and other types of investments can provide the opportunity to grow your wealth over time, no matter how the economy or the markets behave in the short term.