What is a stock?
A share of stock represents a share of ownership in the issuing company. Stock ownership entitles the shareholder to a proportionate share of the company’s earnings. It also allows investors to vote in shareholder meetings, receive dividends (the company’s profits) and gives investors the ability to sell their stock to another investor.
Companies sell stock to raise money to operate their businesses. Stocks are bought and sold mainly on stock exchanges.
Why should I invest in stocks?
The three biggest benefits that stock ownership offers include:
- Growth potential: Over the long term, stocks tend to outperform other types of investments.
- Dividend income potential: Some companies distribute part of their earnings to common stockholders in the form of dividends.
- Ability to vote: Shareholders can influence how the company is managed.
Categories of stocks
Growth and value
Stocks are often categorized as either growth or value.
- Growth stocks: A growth-oriented company is expanding rapidly or becoming increasingly more profitable. As the company enjoys greater success, its stock price should rise. Most investors buy growth stocks hoping to make a profit based on the increase in the company’s stock price. Growth-oriented stocks typically don’t pay large dividends.
- Value stocks: A value-oriented company is usually more established, but has fallen out of favor with investors. Value stock is typically cheaper than growth stock. Investors buy a value stock hoping its price will rebound, and they will realize a profit. Another reason investors buy value stock is to create an income stream from the company’s stock dividend payments.
Capitalization (cap for short) refers to the total value of all outstanding shares of a company’s stock.
- Large-cap companies, which make up about 70% of the U.S. stock market, tend to be more stable than small- or mid-cap companies.
- Mid-cap and small-cap companies each make up about 10% to 15% of the U.S. stock market. These stocks tend to have more growth potential than large-cap stocks, but may be more risky.
What risks are associated with investing in stocks?
Just as stock ownership may offer potential benefits, it also comes with a variety of risks, including but not limited to:
- Business risk: Poorly-run companies can fail, which can cause you to lose some or all of your investment.
- Market risk: Economic developments or other events can cause a decline in a stock’s value.
- Liquidity risk: If you need to sell a stock quickly, you may have to accept a price that is lower than the price you paid when you bought the stock.
- Political risk: Unfavorable government action or social changes can affect stock prices.
- International/sector risk: A stock with its operations in a particular country or sector may be more volatile.
Information provided by SEI Investments Management Corporation. This information is for educational purposes only and should not be relied upon by the reader as research or investment advice. Investing involves risk, including possible loss of principal.