What Is a Stock? A Beginner’s Guide to Investing for Your Future

If you've ever heard someone say they “own stocks” or that “the stock market went up today,” you may have wondered what that actually means.

Stocks are one of the most common ways people invest for long-term goals such as retirement, building wealth, saving for their children, or creating greater financial security.

You don't need to be a Wall Street expert to understand the basics.

Let's start with the simplest question.

What Is a Stock?

A stock represents ownership in a company.

When you buy shares of a publicly traded company, you are purchasing a small ownership interest in that business.

For example, imagine a company is divided into millions of shares.

If you purchase some of those shares, you become one of the company's shareholders.

You don't get an office or a key to the building, unfortunately.

But you do own a small piece of the company.

If the company grows and becomes more valuable, the value of your shares may increase.

If the company struggles, the value of your shares may decrease.

Why Do Companies Sell Stock?

Companies need money to grow.

They may want to:

• Build new locations

• Develop new products

• Hire employees

• Purchase equipment

• Expand into new markets

• Acquire other companies

• Invest in technology

One way a company can raise money is by selling shares of ownership to investors.

When a private company first offers its shares to the public, this is generally called an Initial Public Offering, or IPO.

Afterward, investors can typically buy and sell those shares through stock exchanges.

How Do Investors Make Money From Stocks?

There are two primary ways investors may potentially make money from stocks.

1. The Stock Price Increases

Suppose you purchase a stock for $50 per share.

Years later, the stock is worth $80.

Your investment has increased by $30 per share.

This is called capital appreciation.

Of course, stocks can also decline in value.

If that $50 stock falls to $35, your investment has lost value unless and until the price recovers.

2. Dividends

Some companies distribute part of their profits to shareholders through dividends.

For example, a company might pay shareholders a certain amount for each share they own.

Not every company pays dividends, and dividends are not guaranteed.

Some companies prefer to reinvest their profits into growing the business instead.

Why Do Stock Prices Go Up and Down?

Stock prices can change every day—and sometimes every second.

Prices are influenced by many factors, including:

• Company profits

• Revenue growth

• Interest rates

• Inflation

• Economic conditions

• New products

• Competition

• Government policies

• Industry trends

• Investor expectations

• News and world events

Ultimately, stock prices are influenced by supply and demand.

If more investors want to buy a stock than sell it, the price may rise.

If investors become concerned about the company's future and more people want to sell, the price may fall.

Are Stocks Risky?

Yes.

Stocks involve investment risk, and there is no guarantee that an individual stock will increase in value.

A company can perform poorly.

Industries can change.

Economic recessions can hurt businesses.

Some companies can even fail completely.

That is one reason investors should be careful about putting too much money into a single company.

What Is Diversification?

You've probably heard the expression:

“Don't put all your eggs in one basket.”

That is essentially the idea behind diversification.

Instead of putting your entire investment account into one company, a diversified portfolio may spread money across many investments.

That can include different:

• Companies

• Industries

• Types of stocks

• Bonds

• Geographic regions

• Asset classes

Diversification does not eliminate investment risk or guarantee profits, but it can help reduce the impact that poor performance from one particular investment may have on an overall portfolio.

What Are ETFs and Mutual Funds?

You don't necessarily have to buy individual stocks.

Many investors use Exchange-Traded Funds (ETFs) or mutual funds.

These investments can hold dozens, hundreds or even thousands of individual securities.

For example, an investment fund might own companies across the technology, healthcare, financial, industrial and consumer sectors.

Instead of trying to select every individual company yourself, funds can provide a convenient way to own a diversified collection of investments.

What Is the Stock Market?

The stock market refers broadly to markets where investors buy and sell shares of publicly traded companies.

Major U.S. stock exchanges include the New York Stock Exchange and Nasdaq.

You may also hear about stock market indexes such as the S&P 500.

An index tracks the performance of a particular group of stocks and can help investors understand how a portion of the overall market is performing.

When someone says:

“The market was up today,”

they are often referring to the performance of a major stock market index.

Investing Is Different From Saving

Saving and investing are both important, but they serve different purposes.

Saving

Savings are generally designed for money you may need relatively soon.

Examples might include:

• Emergency funds

• Upcoming purchases

• Short-term expenses

This money is often kept in bank accounts, savings accounts or other relatively stable vehicles.

Investing

Investing generally involves accepting some level of risk in an effort to grow your money over longer periods.

Investments may be appropriate for longer-term goals such as:

• Retirement

• Building wealth

• College funding

• Creating financial independence

• Leaving money to future generations

The appropriate approach depends on your timeline and financial circumstances.

Why Starting Early Can Matter

One of the most powerful concepts in investing is compounding.

Compounding occurs when your investment gains can potentially generate additional gains over time.

Imagine someone invests $500 per month.

That's:

$6,000 per year.

Over 30 years, that person contributes:

$180,000.

If those investments also grow over time, the eventual account value could potentially be significantly greater than the amount originally contributed.

This is why time can be one of an investor's most valuable resources.

You don't necessarily need to start with a huge amount of money.

Starting consistently and allowing investments time to grow can be extremely important.

Should I Wait Until I Have More Money to Start Investing?

Many people believe investing is something they'll begin “once they have more money.”

That can become a trap.

Investing doesn't necessarily require starting with tens of thousands of dollars.

Depending on the investment account and investment chosen, people may be able to begin with relatively modest amounts and contribute over time.

The habit of consistently saving and investing can sometimes be more important than the amount you start with.

Investing Is Not About Getting Rich Quickly

This is an important distinction.

Long-term investing is very different from gambling on which stock might double next month.

Successful investing generally involves concepts such as:

• Having clear goals

• Saving consistently

• Diversifying

• Understanding your risk tolerance

• Keeping investment costs in mind

• Maintaining a long-term perspective

• Avoiding emotional decisions

There will always be investments receiving attention on television, social media and the internet.

But a good investment strategy shouldn't depend entirely on finding the next hot stock.

What Should You Invest In?

There is no investment portfolio that is appropriate for everyone.

A 25-year-old saving for retirement may have very different needs than someone who plans to retire next year.

Before building an investment strategy, consider questions such as:

What am I investing for?

When will I need the money?

How much risk can I financially afford to take?

How much market volatility am I emotionally comfortable with?

How much should I save each month?

Do I have other financial priorities?

The answers help determine what type of investment strategy may be appropriate.

How Strategic Investment Services Can Help

You don't have to become a professional investor to start planning for your financial future.

At Strategic Investment Services, we help clients understand their financial picture and develop investment strategies based on their individual goals.

That may include helping you evaluate:

• How much you're currently saving

• Retirement goals

• Existing investment accounts

• 401(k)s

• IRAs

• Brokerage accounts

• Investment allocation

• Risk tolerance

• Diversification

• College savings

• Short- and long-term goals

Rather than starting with an investment product, we believe the process should start with understanding what you're trying to accomplish.

Investing is a tool.

The financial goal is what gives that tool a purpose.

Saving for Retirement and Your Future

Whether retirement is five years away or thirty years away, the decisions you make today can have an impact on your future.

You don't need to know everything about the stock market before getting started.

You need a plan.

A financial plan can help answer questions such as:

• How much should I save each month?

• Am I saving enough for retirement?

• How should my money be invested?

• Am I taking too much risk?

• Am I taking too little risk?

• How much could my investments potentially grow?

• When might I be able to retire?

Our website also offers financial and retirement calculators that can help you explore different savings and investment scenarios and get an initial idea of what may be required to reach your goals.

Calculators can be a useful starting point.

A personalized financial plan can help put those numbers into context.

Start Building Your Financial Future

You don't have to understand every stock, investment or financial term before taking control of your finances.

The first step may simply be understanding where you are today and where you'd like to be in the future.

Whether you're just beginning to invest, building your retirement savings or wondering whether your current investment strategy is appropriate, Strategic Investment Services can help.

We can help you evaluate your financial situation, understand your investment choices and develop a strategy designed around your goals and time horizon.

Contact Strategic Investment Services to schedule a financial and investment review and start planning for your future.

Important Disclosure

This material is provided for general informational and educational purposes only and should not be considered individualized investment, tax or legal advice. Investing involves risk, including possible loss of principal. Diversification and asset allocation do not guarantee a profit or protect against investment losses. Past performance does not guarantee future results.