Advantages
- Historically, have had greater potential for higher long-term total return than cash or bonds
- Easy to buy and sell
- Can provide capital appreciation as well as income from dividends
- Ownership rights
Tradeoffs
- Poor company performance can affect dividends and share value
- Greater risk to principal
- May not be appropriate for short-term investment
- Subject to market volatility
The amount of a company's dividend can fluctuate with earnings, which are influenced by economic, market, and political events. Dividends are typically not guaranteed and could be changed or eliminated. | |
Types of Investments: Stocks
How do stocks work?
When
you buy a company's stock, you're purchasing a share of ownership in that business.
You become one of the company's stockholders or shareholders. Your percentage of
ownership in a company also represents your share of the risks taken and profits
generated by the company. If the company does well, your share of its earnings will
be proportionate to how much of the company's stock you own. The flip side, of course,
is that your share of any loss will be similarly proportionate to your percentage
of ownership.
Stocks by Size| Size | Description |
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| Large cap | - $10+ billion
- Widely bought and sold
- Often are well-known names
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| Midcap | - $2 billion-$10 billion
- Somewhat smaller than large caps
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| Small cap | - $200 million-$2 billion
- Less widely traded
- Fewer institutional investors
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| Microcap | - $20 million-$200 million
- May trade infrequently
- More difficult to research
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Note:
The values used to define companies by size are highly variable. Different organizations define these ranges in different ways, and the ranges can vary over time with general stock market values.
If you purchase stock, you can make money in one of two ways. The company's board
of directors can decide to distribute a portion of the company's profits to its
shareholders as dividends, which can provide you with income. Also, if the value
of the stock rises, you may be able to sell your stock for more than you paid for
it. Of course, if the value of the stock has declined, you'll lose money.
The role of stocks in your portfolio
Though past performance is no guarantee of future results, stocks historically have
had greater potential for higher long-term total returns than cash alternatives or
bonds.
However, that potential for greater returns comes with greater risk of volatility
and potential for loss. You can lose part or all of the money you invest in a stock.
Because of that volatility, stock investments may not be appropriate for money you
count on to be available in the short term. You'll need to think about whether you
have the financial and emotional ability to ride out those ups and downs as you
try for greater returns. The universe of stocks offers enormous flexibility to construct a stock portfolio that is tailored to your needs. There are many different types of stock, and many different ways to diversify your stock holdings. For example, you can sort through stocks by industry, by
company size, by location, and by growth prospects or income.
Growth stocks are usually characterized by corporate earnings that are increasing
at a faster rate than their industry average or the overall market. Income stocks
(for example, utilities or financial companies) generally offer higher dividend
yields than market averages. Value stocks are typically characterized by selling
at a low price relative to a company's sales, earnings, or book value.
These are only some of the many ways in which stocks can be identified, and your
financial professional can help you decide which might be more appropriate for you
than others. With stocks, it's especially important to diversify your holdings.
That way, if one company is in trouble, it won't have as much impact on your overall
return as it would if it represented your entire portfolio.
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