What are stocks?
Get a better understanding of what stocks are and how you can incorporate them into your investing or trading strategy.
How Do Stocks Work?
Stocks are bought and sold on public exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ. Their prices fluctuate based on factors like company performance, market conditions, economic trends, and investor sentiment.
Investors can earn returns from stocks in two main ways:
Capital appreciation: When the stock price increases over time.
Dividends: Periodic payments some companies distribute to shareholders from their profits.
Types of Stocks
There are different types of stocks designed to meet various investment objectives: Provide voting rights and potential dividends. Offer fixed dividends with priority over common stockholders. Focus on capital appreciation. Dividend stocks: Emphasize regular income.
Are Stocks Right for You?
Investing in stocks depends on your financial goals, time horizon, and risk tolerance. Whether you’re seeking growth, income, or diversification, stocks can play an important role in a well-balanced investment strategy when approached thoughtfully.
Benefits of Investing in Stocks
Stocks offer the potential for long-term growth and help investors stay ahead of inflation. By investing in companies across different sectors, investors can participate in economic expansion while diversifying their portfolios.
Risks to Consider
Stock prices can fluctuate due to market volatility, economic changes, and company-specific events. Understanding these risks is essential to building a strategy that aligns with your goals and risk tolerance.
Stocks as Part of a Diversified Portfolio
Stocks work best when combined with other asset classes such as bonds, cash, or alternative investments. Diversification helps manage risk while maintaining exposure to growth opportunities across markets.
How to Get Started with Stocks
Getting started with stocks begins by defining your financial goals, time horizon, and risk tolerance. With the right tools, research, and guidance, investors can build and manage a stock portfolio that aligns with their objectives and evolves over time.
A Historical Performance Example of Stocks in a Portfolio
Historically, investing in stocks particularly large-cap U.S. equities has delivered higher long-term returns compared to other asset classes, although with greater short-term volatility. This growth potential is a key reason many investors include stocks as a core component of a long-term investment strategy, while managing risk through diversification.
The chart illustrates the historical performance of different asset allocations over a 20 year period, including large-cap U.S. stocks, a moderate allocation portfolio, fixed income, and cash equivalents. For example, an initial investment of $100,000 in large-cap U.S. stocks in 2004 could have grown to approximately $700,000 by 2024, despite periods of market volatility.
While a more diversified portfolio may have generated lower overall returns, it would also have experienced reduced volatility, highlighting the trade-off between risk and return and the value of diversification in building a resilient investment strategy.
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