What are Stocks? Stocks are the backbone to just about any investment portfolio stock. If you are looking at starting your investment portfolio, then you will likely look at purchasing stocks first. So what exactly are stocks? Quite simply a stock is partial ownership in a company. That’s right. When you purchase a stock, you become a part-owner of the company! That means that you can vote at shareholder meetings and share in the growth of the company. That also means that you share in the risk that a company may face. Over the long term, stocks have returned on average of about 9% per year. Therefore, you should consider stocks as part of your long-term investing strategy.
Types of stocks
There are thousands of different types of stocks out there representing all types of companies. Here’s a look at the different types of stocks that are available for purchase.
- Mega cap stocks – These are among the largest companies on the planet such as Microsoft (MSFT) and AAPL (AAPL). A mega-cap stock means the company is worth more than $200 billion.
- Large-cap stocks – Large-cap stocks have a valuation of more than $10 billion but under $200 billion. An example of a larg- cap stock is McDonalds (MCD).
- Midcap-stocks – A mid-cap stock will have a valuation of anywhere between $2 billion to $10 billion.
- Small-cap stocks – Small-cap stocks will have a valuation of anywhere between $300 to $2 billion.
- Penny stock – Typical penny stocks are stocks that sell for less than $5 per share and are considered extremely volatile.
- Dividend stocks – Dividend stocks are stocks that pay an income to investors in the form of monthly or quarterly dividend payments.
- International stocks – International stocks are stocks from companies traded on exchanges outside of your home country.
Examples of popular stocks
There are lots of stocks that you may not have ever heard of. However, there are also some stocks that you may be familiar with. Here’s a look at some popular stocks that make be a great starting point for your portfolio.
- Apple (AAPL)
- Tesla (TSLA)
- Disney (DIS)
- Exxon (XOM)
- Berkshire Hathaway (BRK.A)
There are a number of reasons to add stocks to your investment portfolio. Here’s a look at three compelling reasons:
Long-term capital gains
Stocks can offer you excellent capital gains that will be taxed at a lower rate if you hold them for more than 12 months.
Income generation through dividends
You can also gain income through dividends. That means that the stock pays you every quarter or every month. Grow your dividend stock portfolio large enough and you can live off of your dividend income without ever having to sell your stocks!
Long-term upward bias
Stocks have a long-term upward bias. That means that the value of a stock is more likely to go up over time. In fact, stocks have returned – on average – 9% per year.
There are also some reasons why stocks may not be best for you. Here’s a look at three disadvantages of owning stocks:
Stocks can be volatile. For instance, common stocks such as Apple have lost 50% of its value multiple times over the past 20 years. While owning stock in Apple during that time would have made you very rich, you would have to deal with volatility.
Owning stock does not guarantee a positive return. In fact, some stocks have lost money over the long term.
Sometimes your stocks could go down because of economic factors – such as a recession -or other issues outside of the company’s control. However, these economic factors tend to be short-term.
What role should stocks play in your portfolio?
Stocks are a great part of a long-term investing strategy. Be sure to study the company’s annual reports and consider the long-term prospect of the company. As Warren Buffett says, “Imagine that the stock market will be closed for the next 10 years and ask yourself if you are willing to hold that stock for that amount of time.”