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Learn Understand InvestWhat are stocks?
A stock represents a share in the ownership of a company, including a claim on the company's earnings and assets. As such, stockholders are partial owners of the company. When the value of the business rises or falls, so does the value of the stock. Stocks are generally bought and sold electronically through stock exchanges, the two primary ones in the United States being the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASDAQ). While some companies sell stock directly to investors, most only sell stock through a brokerage such as Schwab. Investors buy and sell stocks for a number of reasons including the potential to grow the value of their investment over time, to potentially profit from shorter-term stock price moves, or even to earn an income by investing in dividend-paying stocks. Keep in mind that the price of a stock can fall as easily as it can rise. Investing in stock offers no guarantee that you will make money, and many investors lose money instead.
How stocks fit within an overall investment portfolio.
Stocks are an important part of any portfolio because of their potential for growth and
higher
returns versus other investment products. In order to determine how much you should
allocate to
stocks, you should first develop a comprehensive financial plan that reflects your
investment
horizon and the level of risk you're willing to accept in exchange for the potential
upside
stocks can offer.
Asset classes perform differently, and it's nearly impossible to predict which asset
class will
perform best in a given year. If you had invested $100,000 in just U.S. Stocks in 1997,
it would
have almost quadrupled to $400,000 by 2017, but there would have been many ups and downs
due to
volatility. A more diversified investment portfolio would have had a lower return, but
reduced
volatility.
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Stocks are an important part of the global economy, allowing companies to raise money for the operation of their businesses by selling shares (or pieces of ownership) to the public. Shares can be bought or sold via an exchange, such as the New York Stock Exchange (NYSE) or Nasdaq. In limited cases, stocks can be sold privately. Specific regulations set by the Securities Exchange Commission (SEC) govern how companies can manage or distribute their stocks. Stocks can be either common stock, which gives shareholders voting rights on certain company decisions, or preferred stock, which gives shareholders no voting rights, but often guarantees them fixed dividend payment in perpetuity.
Imagine that you want to own a cupcake shop, but you only have $1,000 to start. In order to buy the necessary supplies (e.g., flour, icing, cupcake tins), you might raise money from friends and family. Let’s pretend that four of your friends each kick in $1,000, so you have $5,000 total and you’re able to get the business off the ground. In exchange for their investment, you might agree to give each of them 20% of the business and its profits. This is kind of how stocks work, except on a much larger level.
The ‘stock market’ is a broad term that encompasses a collection of markets where the regular buying, selling, and issuance of stocks in publicly held companies takes place. The stock market is an umbrella term for these markets. The stock market is made up of various individual stock exchanges. The most well-known of these stock exchanges in the United States are: the New York Stock Exchange (NYSE), Nasdaq, the Better Alternative Trading System (BATS), and the Chicago Board Options Exchange (CBOE). These exchanges — along with several others — make up the U.S. stock market. While it is called the ‘stock market’ (or the ‘equity market’), other financial instruments — such as bonds, commodities, currencies, and derivatives — are also traded on the stock market.
Types of stock
Learn about three main types of stocks, as well as some potential advantages and considerations.
| Common stock | Preferred stock | American Depositary Receipts (ADRs) | |
Definition |
A stock represents a share in the ownership of a
company,
including a claim on the company's earnings and assets. As such, stockholders are
partial owners
of the company.
Fractional shares of stock also represent ownership of a company, but at a size smaller than a full share of common stock. |
Preferred stocks (or preferred securities) are hybrid investments that share characteristics of both stocks and bonds. They can offer higher yields than many traditional fixed income investments, but they come with different risks. | Many non-U.S. companies, that would otherwise be unavailable or inconvenient to trade, do trade in the U.S. markets as ADRs (receipts for shares of the foreign stock issued by U.S. banks). They are denominated in U.S. dollars and pay dividends in U.S. dollars. |
Advantages |
Potential for higher long-term return. Voting rights (does not apply to owners of fractional shares). Liquidity depending on trading volume. |
Dividends are typically higher and fixed. Share price experiences less volatility compared to common stock. Preferred shareholders are more likely to recover at least part of their investment if company goes bankrupt. |
Local U.S.-based trading tends to be more liquid than local foreign markets. Investors may be able to access financial information more easily than if you invest directly overseas. |
Considerations |
Dividends, if available, are often lower, variable, and not guaranteed. Stock price and dividend may experience more volatility than preferred stock. More likely to lose investment if company goes bankrupt. |
Lower long-term growth potential, if any. No voting rights in most cases. Generally less liquid than common stock. |
Exposure to fluctuations in a foreign company's local currency could affect value of investment. Political or economic events in a foreign company's home country could potentially harm your investment. |
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