Stock prices fluctuate throughout the day, but investors hope the stock will increase in value over time. Not every company or stock does so, however: Companies can lose value or go out of business completely. When that happens, stock investors may lose all or part of their investment. That’s why it’s important for investors to spread their money around, buying stock in many different companies rather than focusing on just one.
If you have a 401(k), you probably already own stock, though you might not realize it. Most employer-sponsored retirement plans invest in mutual funds, which can hold a large number of company stocks pooled together.
Stock as an Investment
Investing in individual stocks takes time. You should research each stock you purchase, which includes a deep dive into the bones of the company and its financials. Many investors opt to save time by investing in stocks through equity mutual funds, index funds, and ETFs instead. These allow you to purchase many stocks in a single transaction, offering instant diversification and reducing the amount of legwork it takes to invest.
There are two main types of stocks: common and preferred. Most investors own common stock in a public company. Common stock may pay dividends, but dividends are not guaranteed and the amount of the dividend is not fixed.
Preferred stocks typically pay fixed dividends, so owners can count on a set amount of income from the stock each year. Owners of preferred stock also stand at the front of the line when it comes to the company’s earnings: Excess cash distributed by dividend is paid to preferred shareholders first, and if the company goes bankrupt, preferred-stock owners receive any liquidation of assets ahead of common-stock owners.