Investing in Stocks

Stocks can offer a good return on investment, but they’re not a one-size-fits-all asset class. Before you decide to invest in stocks, we recommend establishing a comprehensive financial plan and developing a stock portfolio that reflects your investing goals, investment time horizon and risk tolerance.

The first step in that process is understanding what a stock is. Stocks represent ownership stakes in companies and give investors the opportunity to benefit from the growth of those companies by participating in their earnings. Those gains can be realized in two ways: the company’s price increases and/or through dividend payments. Companies can be classified as large-cap, mid-cap or small-cap stocks, and shares of extremely small companies may be referred to as micro-cap stocks.

While many factors can influence a stock’s performance, the most important consideration should always be whether or not it is well-positioned for long-term growth. Generally speaking, a successful company will have a good business model and strong market fundamentals that will support its growth over the long term.

The primary purpose of stocks is to provide investors with the potential for higher returns than other investment products like bonds or real estate, which are considered more “safe” investments. Typically, investors who stay invested in stocks over the long term have historically received very high returns on their initial investments. However, stock investments are volatile and are prone to loss if you sell them quickly or at the wrong time.

A company becomes a “public” stock when it lists its shares on a trading exchange, which makes them accessible to everyday investors and subject to strict regulation by the Securities and Exchange Commission. Being public also allows shareholders to make their own decisions about buying and selling stocks.

There are various tools available for assessing a company’s value, including valuation ratios that compare a company to similar companies in the same industry. But ultimately, a stock’s price is driven by supply and demand: If there are more buyers than sellers, then the share price will rise; if there are more sellers than buyers, then the share price will fall.

When you buy a stock, you’re really purchasing fractional ownership of a company and are only liable for the maximum amount you put into it. This differs from other kinds of investments, such as partnerships, in which you’re personally liable for any debts the partnership incurs.

Investors in public stocks have access to the global economy, which can provide opportunities for international investment as well. When it comes to diversifying your stock portfolio, the best approach is often to use funds that are diversified by sector and country.