Stocks are an investment in a company and that company's profits. Investors buy stock to earn a return on their investment. Simply put, stocks are a way to build wealth. They are an investment that means you own a share in the company that issued the stock. Stocks are how ordinary people invest in some of the most successful companies in the world.
What are stocks and why should you own them?
When you buy the stock of a company, you’re effectively buying an ownership share in that company.
Does that mean you get to sit next to Tim Cook at Apple’s next shareholder meeting? No. But in most cases, it does mean you get a right to vote at those meetings if you choose to exercise it.
But the primary reason that investors own stock is to earn a return on their investment. That return generally comes in two possible ways:
The stock’s price appreciates, which means it goes up. You can then sell the stock for a profit if you’d like.
The stock pays dividends. Not all stocks pay dividends, but many do. Dividends are payments made to shareholders out of the company’s revenue, and they’re typically paid quarterly.
Over the long term, the average annual stock market return is 10%, that average falls to between 7% and 8% after adjusting for inflation. That means $1,000 invested in stocks 30 years ago would be worth over $8,000 today.
It’s important to note that that historical return is an average across all stocks in the S&P 500, a collection of around 500 of the biggest companies in the U.S. It doesn’t mean that every stock posted that kind of return — some posted much less or even failed completely. Others posted much higher returns.
That’s why it’s wise to buy stock, not in just one company but to build a well-rounded portfolio that includes stocks in many companies across various industries and geographies.
How do stocks work?
Companies sell shares in their business to raise money. They then use that money for various initiatives: A company might use the money raised from a stock offering to fund new products or product lines, to invest in growth, to expand their operations, or to pay off debt.
Companies typically begin to issue shares in their stock through a process called an initial public offering, or IPO. Once a company’s stock is on the market, it can be bought and sold among investors. If you decide to buy a stock, you’ll often buy it not from the company itself, but from another investor who wants to sell the stock. Likewise, if you want to sell a stock, you’ll sell to another investor who wants to buy.
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