Stock can be an important part of a comprehensive financial plan, whether you’re saving for life’s big expenses like college or buying a home, or building up a retirement nest egg. However, the idea of investing in stocks can seem intimidating to many people. Often, the term “stock” is used to describe shares of publicly traded companies that are bought and sold on a large, international market called the stock exchange, which is heavily regulated to prevent fraud and benefit investors.
The value of individual company shares rises and falls based on demand, which is determined by the overall perception of how the market feels about the potential success or failure of the company. In general, strong investor demand for a company’s shares tends to be reflected in a higher share price. Conversely, if there are too many sellers in the market or the overall perception is less positive, the share price may decline.
In addition, the number of shares outstanding also affects a company’s stock price, because more shareholders represent a larger claim on the company’s assets and profits. Most stocks are common stock, which gives investors partial ownership of a corporation and the right to receive proportional distributions of its net assets and future profits if the company is liquidated (dissolved). Some companies also offer preferred stock, which typically comes with higher dividend payouts than common shares but does not grant voting rights.
There are thousands of different stocks available for investment, and some of them have very little in common with each other. The more you know about the individual companies you’re considering purchasing, the better your understanding of the potential risk and reward will be. As a basic rule of thumb, you should only invest money that you can afford to lose, and never put any assets in danger of being needed for the immediate future.
The easiest way to get started with investing is through a brokerage account, and many companies offer direct purchase plans that allow you to buy their stock directly rather than using an outside broker. These can be an excellent option if you have a certain amount that you’re comfortable investing on a regular basis, as dollar-cost averaging can make it easier to build up a larger investment over time.
Regardless of what type of account you choose, the most important step is to develop a comprehensive financial plan that reflects your investment horizon and level of risk tolerance, then determine how much you should allocate to stocks. Ultimately, the best way to invest in stocks will depend on your personal goals and preferences, and it’s important that you stay informed by regularly checking in on your portfolio and reading industry news. This will help you make the most of your investments and avoid costly mistakes. Interested in getting started? Talk to one of our advisors about how you can set up your own personalized financial plan.