Businesses sell shares of stock to investors as a way to raise money to finance expansion, pay off debt, and provide operating capital. Each share of stock represents a proportional share of ownership in the company. As a stockholder, you share in a portion of any profits and growth of the company. Dividends from earnings are paid to shareholders, and growth is realized by the increase in value of the stock.
Stock ownership also generally gives you the right to vote on management issues. Company executives work for the shareholders, who are represented by an elected board of directors. The goal of management is to increase the value of the corporation’s equity. If shareholders are dissatisfied with the corporation’s performance, they can vote for a change in management.
Why Invest in Stocks?
The main reason that investors buy stock is to seek capital appreciation and growth. Although past performance is no guarantee of future results, stocks have historically provided a higher average annual rate of return over long periods of time than other investments, including bonds and cash alternatives. Correspondingly, though, stocks are generally considered to have more volatility than bonds or cash alternatives.
Can You Lose Money?
Yes, you can. There are no assurances that a stock will increase in value.
Several factors can affect the value of your stocks:
- Actions of investors: If a large number of investors believe that the nation is entering a recession, their actions can affect the direction of the stock market.
- Business conditions: A new patent, an increase in profits, a pending merger, or litigation could affect investor interest and stock prices.
- Economic conditions: Employment, inflation, inventory, and consumer spending influence the potential profit of a company and its stock price.
- Government actions: Decisions on interest rates, taxes, trade policy, antitrust litigation, and the budget impact stock prices.
- Global economy: Changes in foreign exchange rates, tariffs, or diplomatic relations can cause stocks to go up or down.
All investing involves risks, and there can be no assurance that any investing strategy will be successful. However, understanding these factors can help you make sound investment decisions and keep losses to a minimum.