Investing in Stocks
- Stocks can play an important role in many different portfolios.
- Buying a stock makes you part owner of the issuing company.
- Income stocks pay cash dividends.
- Many factors influence whether a stock’s price rises or falls.
Part of a portfolio
Investors commonly use the major asset classes — stocks, bonds, and cash alternatives — to build their portfolio’s asset allocation (investment mix). Based on their historical performance, stocks have traditionally offered the best potential for growth and can play an important role in almost any portfolio. Of course, past performance is no guarantee of future results.
Owning a piece of the company
Being a stockholder means, quite simply, you are part owner of a company. Think of it this way: If you and a friend went into business together and you both put up equal sums to get started, you would each hold a 50% share in the company.
In return, you each would have an equal say in how the company was run and would both expect to receive equal portions of any company profits. You would also see your investment’s value increase if the company was successful and grew.
Common stock works the same way, only the numbers are much larger. If you owned, for example, 1,000 shares in a company with 2 million shares outstanding, you would own only 1/2,000 of that company.
You would have a say in how the company was run, but your voice would be proportionate to your amount of ownership. Another stockholder with a much larger holding would have a bigger say because he or she would own more of the company.
When stocks pay you
Stockholders elect a board of directors to represent their interests. When the board decides to distribute a portion of the company’s profits, it does so in the form of a dividend. A stock that pays a cash dividend is called an income stock.
On the other hand, a board of directors could also decide to retain profits and reinvest them in the company to help finance future growth. This type of stock is known as a growth stock.
An investor in a growth stock would expect to see his or her profits from owning the stock to come primarily from increases in the stock’s price as the company grows. Changes in interest rates may affect the relative attractiveness of stocks compared to other investments.
How stock prices change
A company’s stock price is influenced by many factors, including its short- and long-term outlook and recent headlines. Stocks may shift from growth to income as the company matures.
Fluctuations in a company’s stock price often indicate how investors believe the company will perform in the future. If the price rises, investors probably think the company’s prospects look good; a falling price, of course, may indicate the opposite.
- Ask your Financial Advisor for more information about stocks.
- Make sure you understand the risks.
- Talk with your Financial Advisor about whether stock investing may be right for you.
Dividends are not guaranteed and are subject to change or elimination.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.