A stock represents a share in the ownership of a company, including a claim on the company's earnings and assets. As such, stockholders are partial owners of the company. When the value of the business rises or falls, so does the value of the stock.
Stocks are generally bought and sold electronically through stock exchanges, the two primary ones in the United States being the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASDAQ). While some companies sell stock directly to investors, most only sell stock through a brokerage such as Schwab. Investors buy and sell stocks for a number of reasons including the potential to grow the value of their investment over time, to potentially profit from shorter-term stock price moves, or even to earn an income by investing in dividend-paying stocks. Keep in mind that the price of a stock can fall as easily as it can rise. Investing in stock offers no guarantee that you will make money, and many investors lose money instead.
Stocks are an important part of any portfolio because of their potential for growth and higher returns versus other investment products. In order to determine how much you should allocate to stocks, you should first develop a comprehensive financial plan that reflects your investment horizon and the level of risk you're willing to accept in exchange for the potential upside stocks can offer.
Asset classes perform differently, and it's nearly impossible to predict which asset class will perform best in a given year. If you had invested $100,000 in just U.S. Stocks in 1997, it would have almost quadrupled to $400,000 by 2017, but there would have been many ups and downs due to volatility. A more diversified investment portfolio would have had a lower return, but reduced volatility.
Learn about three main types of stocks, as well as some potential advantages and considerations.
A common stock represents a share in the ownership of a company, including a claim on the company's earnings and assets. As such, stockholders are partial owners of the company. Fractional shares of stock also represent ownership of a company, but at a size smaller than a full share of common stock.
Potential for higher long-term return. Voting rights (does not apply to owners of fractional shares). Liquidity depending on trading volume.
Dividends, if available, are often lower, variable, and not guaranteed. Stock price and dividend may experience more volatility than preferred stock. More likely to lose investment if company goes bankrupt.
Preferred stocks (or preferred securities) are hybrid investments that share characteristics of both stocks and bonds. They can offer higher yields than many traditional fixed income investments, but they come with different risks.
Dividends are typically higher and fixed. Share price experiences less volatility compared to common stock. Preferred shareholders are more likely to recover at least part of their investment if company goes bankrupt.
Lower long-term growth potential, if any. No voting rights in most cases. Generally less liquid than common stock.
Many non-U.S. companies, that would otherwise be unavailable or inconvenient to trade, do trade in the U.S. markets as ADRs (receipts for shares of the foreign stock issued by U.S. banks). They are denominated in U.S. dollars and pay dividends in U.S. dollars.
Local U.S.-based trading tends to be more liquid than local foreign markets. Investors may be able to access financial information more easily than if you invest directly overseas.
Exposure to fluctuations in a foreign company's local currency could affect value of investment. Political or economic events in a foreign company's home country could potentially harm your investment.
However, it's important to note that investing in stocks also comes with risks. Stock prices can be volatile, and there is always the possibility of loss of principal. It's crucial to conduct thorough research, diversify your portfolio, and consider your risk tolerance and investment goals before investing in stocks. Additionally, seeking guidance from a financial advisor can provide valuable insights tailored to your individual circumstances.
Historically, stocks have demonstrated the potential for significant long-term growth. Despite short-term market fluctuations, the stock market has generally shown an upward trend over the long run. Investing in well-established companies with strong fundamentals and growth prospects can provide an opportunity to participate in this long-term growth and potentially generate substantial returns on investment.
When you invest in stocks, you become a partial owner of the company. This ownership entitles you to a share of the company's profits through dividends and capital appreciation. As the company grows and becomes more profitable, the value of your investment can increase. Owning stocks allows you to align your financial interests with successful companies and benefit from their growth and profitability.
Investing in a diversified portfolio of stocks can help spread your risk across different companies, sectors, and regions. By diversifying your holdings, you reduce the impact of any single company's poor performance on your overall investment. Different industries and sectors may perform differently at various stages of the economic cycle, and diversification allows you to capture growth opportunities while mitigating potential losses. It is important to note that diversification does not guarantee profits or protect against losses, but it can be an effective risk management strategy.
In addition to capital appreciation, stocks can provide a source of passive income through dividends. Many established companies distribute a portion of their profits to shareholders in the form of dividends. Dividend payments can offer a steady income stream, which can be particularly attractive for income-oriented investors, retirees, or those seeking a regular source of cash flow. Dividends can be reinvested to compound your investment over time or used to supplement your income.