Get a better understanding of what stocks are and how you can incorporate them into your trading or investing strategy.
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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Learn about three main types of stocks, as well as some potential advantages and considerations.
Types of stock
- Common stock
- Preferred stock
- American Depositary Receipts (ADRs)
Common stockA 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 stockPreferred 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.>
American Depositary Receipts (ADRs)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.>
Common stockPotential for higher long-term return.>Voting rights (does not apply to owners of fractional shares).Liquidity depending on trading volume.
Preferred stockDividends 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.
American Depositary Receipts (ADRs)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.
Common stockDividends, 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.
Preferred stockLower long-term growth potential, if any.>No voting rights in most cases.Generally less liquid than common stock.
American Depositary Receipts (ADRs)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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