Financial literacy is a topic that’s not generally taught in most school curricula. Therefore, when talking heads on television start spouting their views about this stock or that stock, many people are in the dark. One of the best vehicles for building wealth is the stock market. Here are some important things people need to know about the stock market before investing.
Stocks Give Ownership
Each share of stock is effectively a small slice of ownership within a company. Therefore, people don’t really invest in stocks; they invest in companies. People who realize this will have a vested interest in owning only those companies that have a good possibility of succeeding in the long term. Warren Buffett, America’s most famous investor, once said you shouldn’t think about owning a stock for 10 minutes if you wouldn’t want to hold it for 10 years.
Stocks Are Volatile
Ownership in shares of a company is likely to bring volatility. This is the upward and downward swings in the price of a given stock or index. Prices will go up, and they will go down. Wild swings can happen in a short time frame, and they cause many people to bail at the worst possible time. Knowing that stocks bring risk, especially in the short term, is key to staying the course.
Don’t Invest in One Company
It’s a bad idea to invest in the stock of only one company. In fact, it’s a recipe for disaster. If that one company goes under, investors will lose their entire investments. Therefore, it’s a good idea to invest in the stock of a number of companies or a mutual fund that holds a variety of stocks. Diversification takes care of the risk that comes with holding the stock of only one company because it’s highly unlikely all of the companies in a portfolio will go broke at one time.
Stocks Can Provide Income
Companies will frequently pay their owners a stream of cash-based upon the overall success of the underlying business. These payments are known as dividends, and companies usually pay them on a quarterly basis. This income can go up or down over time, depending upon how the company does. Dividends can go toward buying more stock, or recipients can use them for any purpose they choose.
There Are Other Options
Stocks are a great way to make money. That does not mean they are the only way to make money through investing. There are other options available, like bonds and real estate, and this is a good thing to keep in mind before investing in stocks.