Stocks — Taking stock of long-term growth potential
What are stocks?
A share of stock represents partial ownership of a company. Ownership allows you to share in the company’s earnings. Stocks are categorized in many different ways: company size, industry sector, growth and value, U.S. companies (domestic) and companies outside the U.S. (international).
Stocks offer one of the best ways to build wealth over time.
Understanding risks and returns
Generally, stock prices are driven by supply and demand. If a stock is “hot” and lots of investors want to own shares, they may bid up the price. If investors aren’t so interested, a stock’s price may fall. It is not always clear why investors like or dislike a particular stock. Indecisive investors cause stock prices to go up and down—sometimes a lot—over short time periods. It’s called volatility and it gives stocks a high level of market risk but over time, a company’s earnings typically determine if its stock price goes up, down or sideways.
It can be hard to understand why investors like or dislike a particular stock. However, when you look at longer time periods—20-30 years or more— in general stocks have offered higher returns than bonds, real estate and many other assets, and have beaten inflation by a wide margin. So despite the short-term volatility, many retirement investors use stocks (or mutual funds that invest in stocks) as the foundation of their long-term investment strategy.
How do you make money with stocks?
When you buy stocks, you’re hoping the price will go up so you can sell it later for more than you paid. If you’ve held the stock for more than a year, this profit is considered a capital gain. Capital gains are taxed at a lower rate than regular income. Of course, if the price falls below what you paid, and you sell your shares, you will lose money.
Some stocks pay dividends, which is a way for the company to return some of its profits back to the shareholders. You can take dividends as cash payments and they are taxed at your regular income tax rate. Or you can choose to reinvest your dividends and use them to buy more shares in the company as well as delay any taxes until later.
Diversify to help manage risk and increase return potential
Stocks may offer one of the best ways to outpace inflation and build wealth over the long term. If you’ve got many years before retirement, you may be comfortable having a larger percentage of your portfolio invested in stocks. As you get closer to retirement, you may want to lower volatility and reduce your risk of loss by shifting your investment mix more into bonds and cash accounts. We can help you find a balance that fits your goals and time horizon.
You may also like
Growth-oriented stocks typically sell at relatively high valuations as compared to other types of stocks. Historically, growth-oriented stocks have been more volatile than value-oriented stocks.
International investing involves special risks such as currency fluctuation, lower liquidity, political and economic uncertainties, and differences in accounting standards. Risks of foreign investing are generally intensified for investments in emerging markets.
Securities of mid-sized companies may be more susceptible to price swings and are less liquid than investments in larger companies.
In exchange for higher growth potential, investing in stocks of small- and mid-sized companies may entail greater price volatility and less liquidity than investing in stocks of larger companies.
Internet stocks may offer greater potential for growth, but there are additional market and business risks associated with them, such as a greater degree of change in earnings and greater short-term volatility.