Stocks are one of the basic building blocks of a diversified investment portfolio. They offer the potential for long-term capital gains (share price appreciation) and play an important role in helping you achieve your financial goals, including saving for retirement and education. While stocks have a history of historically higher returns than other asset classes, they do come with some risk. As with any type of investing, it’s important to consider your overall investment plan and how much risk you are comfortable taking in exchange for the potential benefits of stocks.

A share of stock represents a fractional ownership stake in a publicly listed company. Companies issue shares to raise money and use the funds for growth activities like developing new products or hiring more employees. As the value of a company’s stock rises, shareholders can sell their shares for a profit. Many companies also pay dividends, or a portion of their profits, to investors who own their shares. This can be a source of tax-efficient income to supplement your income or help you grow your overall investment portfolio.

Most companies’ shares are traded on a public market, such as the NYSE or Nasdaq. This allows them to be bought and sold easily by individuals or institutions. This liquidity makes stocks a more liquid investment than assets such as real estate, which may take longer to sell.

Over the long term, a well-diversified portfolio of stocks can be expected to provide an average annual return that’s above that of other asset classes. However, the stock market is not without its volatility, which means that it can experience large ups and downs over short periods of time. This can be a result of factors like economic trends and investor sentiment, as well as specific events such as terrorist attacks or natural disasters.

There are various ways to categorize stocks, which can help with research and trading. For example, stocks can be divided by size (market capitalization) to identify large-, mid-, and small-cap stocks. Alternatively, they can be classified by industry or geographic location to identify different investment opportunities around the world. Shares in very small companies are known as “penny” stocks and often have a lower market cap than larger corporations, which can make them more speculative.

Investing in stocks can be part of your strategy for diversifying your portfolio to reduce the impact of market fluctuations on your savings balance. When you build a diverse portfolio, stocks can help mitigate risks by adding exposure to other asset classes that perform differently in different markets and economic conditions.