What are stocks?
Also known as equities, stocks represent units of ownership in a company. When you buy a stock, you're essentially purchasing a fractional ownership of that company. The value of a stock is determined by the company's performance, its future prospects, and supply and demand in the market.
How do stocks work?
Companies sell shares when they decide to raise capital. They typically issue these stocks through an initial public offering (IPO) or subsequent offerings.
Once stocks are issued, they are traded on stock exchanges like the New York Stock Exchange (NYSE) or NASDAQ. Investors can buy and sell stocks through brokerage firms or online trading platforms.
When stocks are traded, their prices can fluctuate based on various factors, including the company's financial performance, industry trends, economic conditions, and investor sentiment.
How stocks build wealth
Investors make a return on their investments through two main ways: Capital appreciation and dividends.
When the stock price goes up, and you then sell it, you profit from capital gains. Additionally, some companies pay dividends to shareholders, which are a portion of the company's profits and they are typically paid quarterly.
Why invest in stocks?
There are several reasons why you might consider investing in stocks:
- Potential for high returns: Historically, stocks have performed better (i.e. generate higher returns) over the long term compared to other asset classes like bonds or cash investments.
- Diversification: Stocks are a basic way to diversify your investment portfolio, thereby spreading out risk.
- Liquidity: Stocks are highly liquid investments, meaning they can be easily bought or sold on the stock market and can be quickly converted to cash.
- Inflation hedge: Stocks have historically provided a hedge against inflation since companies can adjust their prices and earnings to keep pace with rising prices.
While investing in stocks is a great way to build long-term wealth, it also carries risks such as the potential for loss of capital if the company performs poorly or if the market experiences a downturn.
It is therefore important to do your research, diversify your portfolio, and be prepared for market fluctuations. Before investing in stocks, take into consideration your investment goals, time horizon, and risk tolerance. If you feel uncertain about investing on your own, consider consulting with a financial advisor for advice.