What are stocks?
Get a better understanding of what stocks are and how you can incorporate them into your trading or investing strategy.
How do stocks work?
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 CNBC Market.
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. The reasoning behind these decisions is often derived from qualitative and quantitative techniques like fundamental analysis or technical analysis. 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. Payment of stock dividends is not guaranteed, and dividends may be discontinued. The underlying common stock is subject to market and business risks including insolvency.
How do stocks work within a 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 might consider allocating 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.
1. Source: CNBC Market Center for Financial Research with data from Morningstar. The indexes used are: S&P 500 (large cap equity), Russell 2000 (small cap equity), MSCI EAFE Net of Taxes (international equity), Bloomberg Barclays U.S. Aggregate Bond Index (fixed income), Citigroup 3-Month U.S. T-Bills (cash equivalents). The Moderate Allocation is 35% large cap equity, 10% small cap equity, 15% international equity, 35% fixed income, and 5% cash, using the indexes noted. Past performance is no indication of future results.
Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.
2. Standard online $0 commission does not apply to over-the-counter (OTC) equities, transaction-fee mutual funds, futures, fixed-income investments, or trades placed directly on a foreign exchange or in the Canadian market. Options trades will be subject to the standard $0.65 per-contract fee. Service charges apply for trades placed through a broker ($25) or by automated phone ($5). Exchange process, ADR, and Stock Borrow fees still apply. See the CNBC Market Pricing Guide for Individual Investors for full fee and commission schedules.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, please consult with a qualified tax advisor, CPA, financial planner or investment manager.
Preferred stocks generally have lower credit ratings than the firm's individual bonds (2) They generally have a lower claim to assets than the firm's individual bonds (3) Often have higher yields than the firm's individual bonds due to these risk characteristics. (4) Are often callable, meaning the issuing company may redeem the stock at a certain price after a certain date.
Extended Hours Trading may not be suitable for all investors and poses certain risks. These risks include, but are not limited to, lower liquidity, higher volatility and wider spreads.
Short selling is an advanced trading strategy involving potentially unlimited risks, and must be done in a margin account. Margin trading increases your level of market risk.
International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets.
Performance may be affected by risks associated with non-diversification, including investments in specific sectors. Each individual investor should consider these risks carefully before investing in a particular sector.
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