Stocks are issued by companies when they’re looking to raise cash. Once stock is issued, investors can choose to purchase shares of the stock at a particular price, which is determined by the stock market. In exchange for helping to fund the company, investors like you get to benefit from the profits (hopefully) and sometimes losses (bummer). If you choose to invest in stocks, you hope that the company performs well so the value of each share goes up. If the share goes up and you sell it at a higher price than your purchase price, you make a profit.
Shareholders can also benefit from receiving dividends, which are a percentage of earnings that a company pays to its shareholders at regular intervals. Stocks can be a very lucrative investment vehicle, but with the possibility of higher returns comes higher risk. It’s impossible to truly predict future company performance, so it’s very possible that the stock you choose to purchase ends up losing value.
Because of the higher risk of investing in individual stocks, it’s a good idea to include a mix of investment vehicles in your portfolio like bonds, mutual funds, or index funds in addition to or instead of individual stocks. Some people even opt out of investing in individual stocks entirely, choosing more diversified investment options instead.
