Understanding stock market fundamentals is key to making smart investing decisions, keeping a pulse on the market, and eventually taking on more complex trading strategies. Use the terms below to get a jump start on learning basic stock market vocabulary and create a strong foundation for your long-term wealth goals.

In this article, we’ll cover:

• Arbitrage
• Ask
• Asset allocation
• Asset classes
• Averaging down
• Bear market
• Beta
• Bid
• Bid-ask spread
• Blockchain
• Blue-chip stocks
• Bond
• Bull market
• Buyback
• Capitalization
• Capital gains
• Common stock
• Current ratio
• Day trading
• Debt-to-equity ratio
• Diversification
• Dividend
• Dividend yield
• Dollar-cost averaging
• Dow Jones Industrial Average (DJIA)
• Earnings per share (EPS)
• Economic bubble
• Equal weight rating
• Equity income
• Exchange
• Exchange-traded funds (ETFs)
• Expense ratio
• Futures
• Going long
• Going short
• Growth and income funds
• Growth stocks
• Head and shoulders pattern
• Index funds
• Inflation
• Initial public offering (IPO)
• Limit order
• Liquidity 
• Margin
• Market index
• Market volatility 
• Moving average 
• Mutual funds
• NASDAQ
• Non-fungible token (NFT)
• Order imbalance
• OTC stocks
• Outstanding shares
• P/E ratio
• Preferred stock
• Price quote
• Profit margin
• Recession
• Risk tolerance
• Roth IRA
• Sector
• Shares
• Stock market holidays
• Stock option
• Stock portfolio 
• Stock split
• Time horizon
• Value stocks
• Volume
• Volume-weighted average price (VWAP)
• Yield
• 52-week range

What is the stock market?

The stock market is a collection of markets where people buy and sell shares of publicly traded companies. When someone invests in a stock, their investment is represented by a share, or partial ownership, of that company. 

The stock market operates by potential buyers naming the highest price they’ll pay for an asset (the “bid”) and potential sellers naming the lowest price they’re willing to sell for (the “ask”). Trades are typically executed by stockbrokers on behalf of individual investors.

72 stock market terms for new investors  

The stock market terms below are a great starting point if you’re new to trading stocks. Study these terms to familiarize yourself with common stock lingo that any new investor should understand. 

1. Arbitrage 

Arbitrage refers to purchasing an asset from one market and selling it to another market where the selling price is higher than what you paid for it, resulting in profit. 

2. Ask

An ask is the selling price that a trader offers for their shares. 

3. Asset Allocation

Asset allocation is an investment strategy that aims to balance risk and reward by dividing a certain percentage of investments—like stocks, bonds, real estate, cash, etc.—across different assets in an investment portfolio. 

4. Asset Classes

Asset classes are categories of assets, such as stocks, bonds, real estate, or cash. 

5. Averaging Down

Averaging down is an investing strategy that involves buying additional shares of an asset or stock after its price has fallen, resulting in a lower average purchase price. 

6. Bear Market

A bear market is a market condition in which prices are expected to fall. Typically, this entails major indexes or stocks decreasing by 20% or more compared to previous highs. 

7. Beta

Beta is the measure of an asset’s risk in relation to the market. A stock with a beta of 1.5 means that the stock typically moves 50% more than the market in the same direction. Generally, a higher beta indicates a riskier investment—if the market rises 10%, the stock will rise by 15%, but if the market falls by 10%, the stock will fall by 15%. 

8. Bid

The price a trader is willing to pay for shares of a stock or other asset. 

9. Bid-Ask Spread

Bid-ask spread is the difference between what buyers are willing to pay and the price sellers are asking for a stock. 

10. Blockchain

A blockchain is a record-keeping database in which transactions made in Bitcoin or other cryptocurrencies are recorded across multiple computers and distributed across the entire network of those computers.

11. Blue-Chip Stocks

Blue-chip stocks are common stocks of well-known companies known for their quality and history of growth. 

12. Bond

A bond is a type of security loaned by an investor to a borrower like a company or government used to fund its operations. 

13. Bull Market

A bull market is a market condition in which prices are expected to rise.

14. Buyback

A buyback is when a company repurchases outstanding shares to reduce the number of shares on the market and return profits to their investors, resulting in an increased value of the remaining shares. 

15. Capitalization

Also known as market cap, capitalization is the total market value of all a company’s outstanding shares. It’s calculated by multiplying the total number of shares by the current share price. 

16. Capital Gains 

Capital gains refers to the profit earned after selling an asset or investment for a higher price than you paid for it. 

17. Common Stock

This is one of the most basic stock market terms to know. Common stock is a type of security that represents ownership in a company. Holders of common stock are able to vote on matters like corporate policies and elect directors within that company. 

18. Current Ratio

The current ratio is a measure of a company’s ability to pay short-term debt. It’s determined by dividing current assets by current liabilities. 

19. Day Trading

Day trading is the practice of buying and selling shares of stock within a single day.   

20. Debt-to-Equity Ratio

Debt-to-equity ratio represents a function of a company’s debt relative to its equity, or the value of its assets minus its liabilities. The ratio is found by dividing total liabilities by total shareholder equity. 

21. Diversification

Diversification is an investment strategy that divides investment funds across a variety of assets in order to minimize overall risk. 

 22. Dividend

“Dividend” is one of the most basic terms for the stock market. It’s simply a portion of a company’s earnings paid out to its shareholders. 

23. Dividend Yield

A dividend yield is a dividend expressed as a percentage of its stock price. 

24. Dollar-Cost Averaging

Dollar-cost averaging is an investment strategy in which you invest a fixed amount on a regular basis regardless of the price of the asset. 

25. Dow Jones Industrial Average (DJIA)

Also known as Dow 30, the Dow Jones Industrial Average is a stock market index consisting of the 30 most-traded blue-chip stocks on the New York Stock Exchange. It’s used to measure the performance of shares among the largest U.S. companies and gauge the overall direction of stock prices. 

26. Earnings per Share (EPS)

Earnings per share is a company’s profit divided by its number of outstanding shares, and is used to measure corporate profitability.

27. Economic Bubble

An economic bubble is a situation where asset prices surge to significantly higher levels than the fundamental value of that asset. 

28. Equal Weight Rating

An equal weight rating is a measure used by equity analysts to signify how well a stock is performing relative to other stocks. An equal weight rating suggests that a stock will perform similarly with the average of all the stocks being used for comparison.

29. Equity Income

Equity income is used to describe any income received from stock dividends. 

30. Exchange

An exchange, or stock exchange, is a marketplace where investors and traders buy and sell stocks. You’ve probably heard of the most well-known exchanges in the U.S.: the New York Stock Exchange (NYSE) and Nasdaq. 

31. Exchange-Traded Funds (ETFs)

Commonly known as ETFs, exchange-traded funds are a collection of stocks or bonds combined in a single fund that can be purchased and traded on major stock exchanges. Similar to mutual funds, they’re a pooled investment fund, meaning a “pool” of money is aggregated from multiple investors. 

32. Expense Ratio

An expense ratio measures the cost of owning a mutual fund, including expenses like the management of the fund, overhead fees, and any other costs associated with running the fund. It’s essentially an administrative fee paid to the company in return for owning the fund. The ratio is measured as a percentage of your total investment—for example, if you invest $10,000 in a fund with an expense ratio of .20%, you’ll pay $20 on top of your investment. 

33. Futures

A future is a contract that requires a buyer to purchase a specific asset, and the seller to sell that asset at a certain future date at an agreed-upon price. Futures are a way for investors to hedge current investments—a risk management strategy intended to offset potential losses in other investments.

34. Going Long

Going long refers to the act of buying stock shares with the expectation that the asset’s price will rise, resulting in a profit. 

35. Going Short

Going short—the opposite of going long—refers to the act of selling stock shares with the expectation that the asset’s price will fall. When an investor goes short on an asset, they borrow that asset, sell it, and hopefully purchase it later at a lower price if the price does decline, resulting in profit. 

36. Growth and Income Funds

This is a type of mutual fund or ETF that has both a history of capital gains (growth) and income generated from dividends (income). Growth and income funds have a two-sided strategy of both long-term growth and short-term income. 

37. Growth Stocks

A growth stock is a common stock of a company whose revenues are expected to grow at a significantly higher rate than what’s average for that industry. 

38. Head and Shoulders Pattern

The head and shoulders pattern refers to a specific chart formation seen on a technical analysis chart. It appears when a stock price reaches three peaks: when the price peaks then declines; rises above that peak and declines again; and rises a third time (but not as high as the second peak) and then declines again. The second peak represents the formation’s “head,” and the first and third peaks represent the “shoulders.” It’s generally considered to be an indicator of an impending bear market. 

 39. Index Funds

Index funds are investment funds that follow the performance of a specific benchmark or stock market index, like the S&P 500. When you invest in an index fund, your money is used to invest in every company in that index. This results in a more diverse portfolio than if you were hand-selecting individual stocks, for example. 

40. Inflation

Inflation is the rate of increase in prices for goods and services in the economy. 

41. Initial Public Offering (IPO)

An IPO refers to a previously private company that becomes public by selling stock 

shares on the stock market. 

42. Limit Order

A limit order is an order to buy or sell a stock at or below a specific price. Limit orders give traders control over how much they pay. 

43. Liquidity 

Liquidity measures how quickly and easily a stock can be bought or sold without impacting its price. Cash, for example, is the most liquid asset—no exchange is necessary to gain value from it, and it’s already in its most liquid form. On the other hand, a car is less liquid—regardless of its value, you might have to wait to sell it at its best price. 

44. Margin

Sometimes referred to as “buying on margin,” margin is when investors borrow money from a broker to purchase a stock, similar to a loan. 

45. Market Index

A market index tracks the performance of a certain collection of stocks, often grouped to represent a certain industry. They’re a tool for investors to gauge the health of the stock market by comparing current and past stock prices.

46. Market Volatility

Market volatility is a measure of how much and how often the value of the stock market fluctuates. 

47. Moving Average

A moving average is the average price of stocks or other assets over a specific period of time. Generally used in technical analysis charts, it’s calculated by averaging data from the previous time periods to help investors identify the current direction of price trends.

48. Mutual Funds

Mutual funds are pools of investments from shareholders used to “mutually” buy securities like stocks, bonds, and other assets. 

49. Nasdaq

Nasdaq, or National Association of Securities Dealers Automated Quotations, is an electronic exchange where investors can buy and sell stocks through an automated network of computers. It’s the second-largest stock exchange in the world, following the NYSE.  

More broadly, Nasdaq can also refer to the Nasdaq Composite Index, a stock market index of over 3,300 companies listed on the Nasdaq exchange. In this context, it can be thought of similarly to other indexes like the DJIA or the S&P 500.

50. Non-Fungible Token (NFT)

A non-fungible token, more commonly known as an NFT, is a blockchain-based financial security. Each NFT represents a unique digital asset. “Non-fungible” indicates that it can’t be replicated or replaced with something else. 

51. Order Imbalance

An order imbalance occurs when orders of one type of stock aren’t offset by opposite orders, resulting in an excess of orders for that specific stock and sometimes volatile price changes. 

52. OTC Stocks

OTC stocks, or over-the-counter stocks, are securities that are traded on a broker-dealer network instead of on a major U.S. stock exchange. They’re often used by smaller companies who don’t meet the requirements to be listed on a formal stock exchange.

53. Outstanding Shares

Outstanding shares refers to the total number of a company’s shares that have been issued to shareholders, including restricted shares. 

54. P/E Ratio

Used to value a company, the P/E ratio, or price-earnings ratio, is the ratio of a company’s share price to the company’s earnings per share. 

55. Preferred Stock

Preferred stock is a type of stock that combines characteristics of both common stock and bonds. Owners of preferred stock receive different rights than common stockholders, like receiving dividends before common stockholders, but they generally don’t come with corporate voting rights like common stocks do. 

56. Price Quote

A price quote is the price of a stock or other security as quoted on an exchange. Price quotes usually come with important supplemental information to help traders make more informed investment decisions. 

57. Profit Margin

Profit margins are used to gauge the profitability of a company. It’s expressed as a percentage and is calculated by dividing the company’s net profit (total revenue minus total expenses) by total revenue. 

58. Recession

A recession is defined as a period of decline in economic performance throughout the economy, generally lasting for at least several months. 

59. Risk Tolerance

Risk tolerance is a measure of the level of risk you’re willing to accept on your investments. Someone with a lower risk tolerance typically sees lower returns on their investments in exchange for lower overall risk in periods of market decline. 

60. Roth IRA

A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars, allowing your earnings to grow and be withdrawn tax-free. 

61. Sector

The stock market includes shares from thousands of different companies, which are broken into 11 different sectors. A sector is a group of companies with similar business products, services, or characteristics. 

62. Shares

Shares are units of ownership in part of a company’s total stock. 

63. Stock Market Holidays

While this isn’t necessarily a term or definition, it’s important to know what days you can and can’t buy or sell on the U.S. stock exchange. The U.S. stock market observes 10 holidays a year, closing on those days. In 2023, the observed holidays are New Years Day, Martin Luther King Jr. Day, President’s Day, Good Friday, Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day, Thanksgiving, and Christmas.

64. Stock Option

A stock option is a contract that gives an investor the right to purchase or sell a specific number of stock shares at a predetermined price within a specified time period. 

65. Stock Portfolio

A stock portfolio is an individual’s collection of investments, including stocks, bonds, mutual funds, and other financial assets. While a portfolio refers to all of your investments, they might not be contained in one single account. 

66. Stock Split

A stock split occurs when a corporation increases the number of its outstanding shares by distributing more shares to current stockholders. By splitting existing shares into multiple new shares, the stock becomes more affordable. 

67. Time Horizon

Time horizon refers to the period of time an investor expects to hold an investment, which will vary based on personal investment goals and strategies. For example, investing in a retirement account like a 401(k) has a longer time horizon, since the funds won’t be withdrawn until you reach retirement age. Generally speaking, longer time horizons correlate to more risk potential in a portfolio, and shorter time horizons correlate to a more conservative (less risky) portfolio. 

68. Value Stocks

Value stocks are shares of companies selling at bargain prices that investors expect to rise because the company’s financial fundamentals suggest the shares are actually worth more than the current value.

69. Volume

Volume is a measure of how much a certain stock or other investment has been traded over a certain period of time. Volume is a critical component of strategically analyzing stock market trends, and is often used to determine market strength.  

70. Volume-Weighted Average Price (VWAP)

Volume-weighted average price (VWAP) is a measure of the average trading price of a stock or other asset, adjusted for volume. It’s calculated by dividing the total dollar value of trading in that asset by the volume of trades. 

71. Yield 

Yield refers to the income earned on an investment over a set period of time, expressed as a percentage of your original investment. 

72. 52-week Range

The 52-week range is a technical indicator that measures the lowest and highest price of a stock traded during a 52-week period. Traders use this measure to analyze current stock prices and predict its future movements. 

Learning to navigate the stock market and stock trade terms for the first time might feel daunting, but consider this your official first step on the path to developing your investing muscles. When you come across a term you’re unfamiliar with in your own research, refer back to this post until you’ve mastered them. You’ll find that learning these stock terms for beginners is more doable than you think. 

The more time you invest in learning stock market terms and fundamentals, the more confident you’ll become as an investor. And if you’re looking for a little more support, consider turning to a platform like Stash. We make it easy to invest what you can afford on a set schedule, all the while providing unlimited financial education and personalized advice based on your risk level—so you can start building long-term wealth, even if you’ve never invested before. 

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FAQs About Stock Market Terms 

Have more questions about stock market terms? We have answers.

Why Should You Know Stock Market Terms? 

Establishing a working knowledge of stock market terms forms the foundation for the rest of your investment journey. It’s the gateway to crafting a strategic market approach, understanding different trading strategies, and making sense of market fluctuations that will inform your future trading decisions. 

How Do You Buy Stocks? 

Before investing a dollar, get clear on your investment goals—this informs everything from your investment timeline to the specific investments you’ll choose. From there, the process of buying your first shares of stock is surprisingly easy:

1. Open a brokerage account
2. Research what stocks you want to buy
3. Determine how much you can afford to invest 
4. Purchase your first share
5. Maximize returns with a buy and hold strategy

What Are the Most Used Stock Market Terms?

The most used stock market terms include bear market, bull market, dividend, ask, bid, and blue-chip stocks. 

The post 72 Stock Market Terms Every Beginner Trader Should Know appeared first on Stash Learn.

With a dizzying amount of information available, understanding facts about the stock market can feel daunting. Luckily, we’ve compiled a list of the most interesting stock market facts for 2023 and beyond.  

To round out your understanding of the stock market, here’s what you’ll find in this article: 

• Interesting stock market facts 
• Stock market statistics by demographic
• Stock exchange statistics
• Stock market performance statistics
• Stock market statistics by country
• Stock market statistics by industry and sector
• Stock market statistics by company
• Stock market statistics: robo-advisors 
• Mutual funds and ETFs statistics
• Retirement investment statistics 

Read along for the top stock market statistics of 2023.

Interesting stock market facts

Many investors were happy enough to see the first half of 2022 come to end after the S&P 500 declined by more than 20%, turning in the worst market performance in decades. 

This has left many investors feeling confused and pessimistic about the current state of the market—but if you’re a younger investor with a longer time horizon, there’s still reason for optimism. Market fluctuations are normal and will pivot over the course of 10, 20, and 30 years, giving your money plenty of time to grow despite the current state of the market. 

To that end, here are some more interesting stock market facts to be aware of:

1. Stock portfolios and retirement accounts took a beating in the first half of 2022, with the S&P 500 falling by 21%. (Bankrate)
2. On June 13, 2022, the stock market closed at more than 20% below January highs, putting the market into a bear market. (Bankrate)
3. The U.S. represents 40.9% of the $108 trillion world stock market capitalization. (SIFMA)
4. As of March 2022, the total market capitalization of the U.S. stock market is $48,264,353.4 million. (Siblis Research)
5. The stock market usually performs the worst in September—dubbed the “September Effect,” the S&P 500 has averaged a 1% decline in September from 1928 to 2021. (Investopedia)
6. The total market capitalization of domestic companies listed on global stock exchanges was $105 trillion in June 2022. (World Federation of Exchanges x Statista) 
7. In 2022, the total market capitalization of the Global Top 100 companies is $35.2 billion. (PwC)
8. The New York Stock Exchange (NYSE) is the largest stock exchange in the world, with a market capitalization valued at just over $25.8 trillion in June 2022. (World Federation of Exchanges x Statista) 

Stock market statistics by demographic

The percentage of Americans who report owning stock in 2023 has increased from 56% in 2021 to 61% in 2023, making it the highest percentage of ownership since 2008.

When it comes to stock ownership by age group, millennials own a marginal share—just 2.4%—of all U.S. stocks compared to older generations. Take baby boomers, for example, who own 55.7% of all U.S. stocks, or Gen X, whose share amounts to 26.8% of all stocks. While stock ownership among millennials has incrementally risen over the last five years, they’re still behind older generations when it comes to building long-term wealth. 

9. Millennials own just 2.4% of all U.S. stocks, equating to about $1 trillion in Q2 2023. (The Federal Reserve)
10. Gen X owned 26.8% of all U.S. stocks in Q2 2023. (The Federal Reserve)
11. Baby boomers owned 55.7% of all U.S. stocks in Q2 2023. (The Federal Reserve)
12. The Silent Generation owned 15% of all U.S. stocks in Q2 2023. (The Federal Reserve)
13. Of the total liquid assets owned across U.S. households in 2023, 45% were in stocks, 25.3% in bank deposits and CDs, and 16.5% in mutual funds. (SIFMA)
14. Over one-third of Americans don’t own investments or investment accounts in 2022. (eMoney) 
15. 45% of U.S. households owned equities in 2023. (Federal Reserve Board x SIFMA)  
16. As of April 2023, the percentage of Americans who own stocks jumped to 61%. (Gallup)
17. 38% of Americans use a financial advisor to manage their investments in 2022. (eMoney) 
18. 84% of adults with a household income of $100,000 or more owned stock in 2023. (Gallup)
19. 63% of adults with a household income between $40,000 and $99,000 owned stock in 2023. (Gallup)
20. Only 29% of adults with a household income of less than $40,000 owned stock in 2023. (Gallup)
21. The value of U.S. households’ liquid assets lowered to $58.6 trillion in 2023, decreasing 11% year over year. (Federal Reserve Board x SIFMA) 
22. 2023 saw 60% of women in the U.S. investing in the stock market. (Fidelity)
23. Of women in the U.S. who are investing, 71% are Gen Z (ages 11 – 26),  63% are millennials (ages 27–42), 55% are Gen X (ages 43–58) and 57% are boomers (ages 59–77). (Fidelity)
24. 20% of women reported investing in new asset classes for the first time in 2021. (Fidelity) 
25. Of women in the U.S. who invested in new asset classes for the first time in 2021, 67% invested in stocks or bonds, 63% invested in mutual funds or exchange-traded funds (ETFs) and 50% invested in money market funds or CDs. (Fidelity)
26. 41% of Americans ages 18–29 owned stock in April 2023. (Gallup)
27. 67% of Americans ages 30–49 owned stock in April 2023. (Gallup)
28. 66% of Americans ages 50–64 owned stock in April 2023. (Gallup)
29. 63% of Americans ages 65+ owned stock in April 2023. (Gallup)
30. Of Americans who owned stock in 2023, 67% were non-Hispanic white adults and 49% were people of color. (Gallup)
31. Participation in employer-sponsored retirement plans was lowest among employees age 25 or younger in 2022, with 62% of those employees contributing. (Vanguard)
32. 86% of employees ages 35–64 contributed to their retirement accounts in 2022. (Vanguard)
33. Women are more likely than men to join their employer’s retirement plan, regardless of income levels. (Vanguard)

The data above shows a clear gap in investments among millennials, whether it be stock ownership or contributing to their employer’s retirement plans. But if you’re in this age group, now is one of the best possible times to start investing—with a longer time horizon until retirement, there’s ample opportunity to let your money compound over time. 

Stock exchange statistics

To understand the size of the stock market, it’s helpful to analyze specific stock exchange statistics. 

There are 60 stock exchanges across the globe, the largest being the NYSE, whose stock market capitalization nears $25 million in July 2023. Market capitalization, or market cap, refers to the total value of a company’s shares of publicly traded stock.

34. Global stock market capitalization decreased 18% in 2022, totaling $101.2 trillion. (SIFMA) 
35. In 2023, the NYSE held around 20% of all equities traded in the market, accounting for the largest share of all stock exchange operators in the U.S. (Chicago Board Options Exchange x Statista)
36. Following the NYSE, the Nasdaq held the second largest share across all stock exchanges in 2023, accounting for 16%. (Chicago Board Options Exchange x Statista)
37. The combined market capitalization for the NYSE and the Nasdaq totaled close to $47 trillion in 2023. (World Federation of Exchanges x Statista)
38. In July 2023, the NYSE held a market capitalization of $25 trillion. (World Federation of Exchanges x Statista)
39. In July 2023, the Nasdaq held a market capitalization of $22 trillion. (World Federation of Exchanges x Statista)
40. Global equity issuance decreased 61% in 2022, totaling $400 billion. (SIFMA)
41. Global fixed-income markets (bond markets) decreased 3.2% in 2021, totaling $129.8 trillion. (SIFMA)
42. Global fixed-income issuance decreased 17.5% in 2022 to $22.5 trillion. (SIFMA)  
43. Following the NYSE, the Nasdaq had the second highest global market capitalization valued at $22 trillion in July 2023. (World Federation of Exchanges x Statista) 
44. Between February 12 and March 11, 2020, the Dow Jones Industrial Average (DJIA) index dropped close to 8,000 points, but recovered to 33,832.42 points as of October 2023. (Yahoo! Finance)
45. Despite the economic downturn seen during the COVID-19 pandemic, the S&P 500 index was valued at 4,766.18 points at the end of 2021—the highest value on record. (Yahoo! Finance)
46. The Nasdaq Composite Index decreased 33% in 2022, ending the year with 10,466.48 points. (SIFMA)
47. The average daily trading volume of Nasdaq-listed stocks was 4,966 shares in 2022, totaling $239 billion in value. (SIFMA)
48. The average daily trading volume of NYSE-listed stocks was 4,603 shares in 2022, totaling $193.7 billion in value. (SIFMA)

Stock market performance statistics 

The second half of 2021 saw soaring gas prices, the continued disruption of supply chains, and increasing inflation pressures. However, a look at the most recent stock trading statistics tells us that the value of publicly traded companies is growing—a notable trend considering business growth and value is a key indicator of stock market performance. 

49. Global equity trading was valued at $41.8 trillion in Q3 2021. (World Federation of Exchanges)
50. The total market capitalization of the Global Top 100 companies hit a record-breaking $35.2 trillion in March 2022. (PwC)
51. In 2023, the total market capitalization of the Global Top 100 companies decreased by 11.1% compared to 2022. (PwC)
52. Globally, the top asset by market capitalization is gold, valued at $13.162 trillion. (Companies Market Cap)
53. The compound annual growth rate (CAGR) of the Global Top 100 companies has increased 11.7% in 2023. (PwC)
54. In 2022, initial public offering (IPO) volume was $8.5 billion, an 94% decrease from the year prior. (SIFMA) 
55. The dollar volume of average daily trading of municipal bonds in the U.S. totaled $13,135.4 million in 2022, a 21% increase from the year prior. (SIFMA) 
56. There were  50,593 U.S. municipal bonds traded daily on average in 2022, increasing 66% from the previous year. (SIFMA) 
57. The dollar volume of average daily trading in U.S. equity markets totaled $573.1 billion in 2022. (SIFMA) 
58. The average daily trading volume for equities was 11.9 billion shares in 2022, a 4.1% increase year over year. (SIFMA) 
59. Charles Schwab had $7.38 trillion in client assets at the end of March 2023 (Charles Schwab Corporation)
60. Fidelity had $4.5 trillion in client assets at the end of June 2023. (Fidelity)

Even amid the current volatility of the economy, the data above paints an optimistic picture of what to expect for the long term. And if you’re a younger investor with decades left before you retire, this is good news indeed. 

Stock market statistics by country

In analyzing stock market facts by country, the biggest takeaway to note is that the U.S. continues to dominate in terms of total value and growth rates. The U.S. stock markets are the largest across the globe and continue to represent the lion’s share in terms of global market capitalization. 

61. With a total global market capitalization share of 70% as of March 2023, the U.S. continues to dominate the majority share of global market capitalization. (PwC)
62. The market capitalization of U.S. companies in the Global Top 100 decreased 12% from March 2022 to March 2023. (PwC) 
63. By contrast, the value of the Top 100 companies from China and its regions decreased by 11%. (PwC)
64. While China’s market capitalization decreased in 2023, its CAGR has still steadily grown by 11.5% in the last 10 years. (PwC)
65. The top publicly traded companies in the U.S. by revenue equal a total revenue of $21.2 trillion. (Companies Market Cap)
66. The total market capitalization of the 311 largest Chinese companies is $5.9 trillion. (Companies Market Cap)
67. The top publicly traded companies in China by revenue equal a total revenue of $5.5 trillion. (Companies Market Cap)
68. The total market capitalization of the 349 largest Japanese companies is $4.084 trillion. (Companies Market Cap)

The impressive market capitalization of the U.S. is a golden opportunity for investors, creating ample exposure to some of the world’s most valuable companies—and the chance to invest in them.  

Stock  market statistics by industry and sector

In terms of market capitalization, the technology sector has led the pack for the last five years, increasing by $7.08 trillion since 2018. For more context, the technology sector accounted for 21% of the Global Top 100 companies with a market capitalization of $3.6 trillion—in 2022, it accounts for 34%.  

Technology isn’t the only sector showing increasing dominance, however. The same can be said for the health care sector, whose market capitalization has significantly increased since 2018. 

69. Technology companies accounted for 34% of the Global Top 100 in 2022, with a combined market capitalization of $12 trillion. (PwC)
70. Health care companies in the Global Top 100 have increased 84% since 2018. (PwC)
71. Of all sectors, the energy sector has seen the largest increase in market capitalization, increasing 57% since August 2021. Its value as of August 2022 is $3.54 trillion. (Fidelity)
72. The energy sector has also steadily grown since 2018, increasing by 151%. (PwC) 
73. The information technology sector holds the highest market capitalization across sectors, totaling $13 trillion in August 2022. (Fidelity)
74.  The basic materials, consumer discretionary, consumer staples, industrials, telecommunications, and utilities sectors account for 33% of total market capitalization. (PwC)
75. The top three leading U.S. industries in revenue in 2022 are drug, cosmetic and toiletry wholesaling, pharmaceuticals wholesaling, and new car dealers, whose combined revenue totals roughly $3.3 billion. (IBISWorld)
76. For 2022, the drug, cosmetic and toiletry wholesaling industry totaled $1.2 billion in revenue. (IBISWorld)
77. The new car dealers industry totaled $1.1 billion in revenue in 2022. (IBISWorld) 
78. The pharmaceuticals wholesaling industry totaled $1.1 billion in revenue in 2022. (IBISWorld) 
79. The health and medical insurance industry totaled $1 billion in revenue in 2022. (IBISWorld) 

Knowing how different sectors are performing on the market is a critical part of any investing strategy, and young investors would be wise to stay abreast of these trends to inform their investment decisions. 

Stock market statistics by company

Given the explosive growth of the technology sector, the same long-term growth trend can be seen in the world’s largest technology companies in 2022. 

While Apple has long held the position of the most valuable company across the globe, Saudi Aramco surpassed Apple—albeit marginally—in May 2022, reaching a market capitalization of $2.4 trillion before Apple reclaimed the spot in August. 

80.  The largest five U.S. companies by market capitalization are Apple, Microsoft, Alphabet (Google), Amazon, and Tesla, totaling roughly $961 trillion. (Companies Market Cap)
81. In 2022, Alphabet saw a market capitalization increase of 32%, surpassing Amazon for the first time since 2018. (PwC) 
82.  Apple is the world’s most valuable company, with a market capitalization of $2.58 trillion as of August 2022. (Companies Market Cap)
83. The company with the second highest market capitalization is Microsoft, valued at $2 trillion in August 2022. (Companies Market Cap). 
84.  In March 2022, both Apple and Microsoft’s market capitalization surpassed Saudi Aramco’s. (PwC) 
85. The top five publicly traded U.S. companies by revenue are Walmart, Amazon, Apple, Berkshire Hathaway, and ExxonMobil. (Companies Market Cap)
86. Walmart, the top publicly traded U.S. company by revenue, has a total revenue of $576 billion. (Companies Market Cap)
87. Of the Global Top 100 companies, Shell saw the highest rise in market capitalization, increasing 161% from 2021 to 2022. (PwC)

Understanding which companies have consistently performed well—regardless of the state of the market—is key to any successful investment strategy. While past performance is no guarantee of future results, companies that have consistently held the highest market share are a good place to start when choosing what companies to invest in. 

Stock market statistics: robo-advisors

The large-scale interest and growth of robo-advisors is tied to both the growing digitization of the financial services industry and the sustained underperformance of ETFs and falling commodity prices over the last decade. 

An ETF is a basket of securities you invest in—typically a mix of stocks and bonds—versus a single security like a stock or bond, and are bought and sold based on market share prices.

For both large investment funds and everyday individuals alike, the efficiency of automated portfolio management via robo-advisory technology has become preferable to traditional alternatives. 

88. The robo-advisor industry grew by 6% in 2021. (IBISWorld)
89.  The U.S. has the most assets under robo-advisor management by country, totaling $1.16 billion in 2022. (Statista)
90. As of 2022, there are $1.66 million of assets under robo-advisor management globally. (Statista)  
91. There are 12.6 million people in the U.S. using a robo-advisor in 2022. (Statista)  
92. Total assets under robo-advisor management increased by 16.1% globally in 2022. (Statista)  
93. Assets under management of robo-advisors are expected to reach a total of $3.22 trillion globally by 2027. (Statista) 
94. The annual growth rate of assets under robo-advisor management is projected to increase by 15% globally by 2027. (Statista) 
95. The number of people utilizing robo-advisors is expected to reach 543.2 million globally by 2027. (Statista) 
96. On average, individuals have $92,220 in assets managed by a robo-advisor in the U.S. in 2022. (Statista)
97.  Of all people using robo-advisors in the U.S., 25–34-year-olds make up the majority, accounting for 35.7%. (Statista) 
98.  Following behind 25–34-year-olds, 35–44-year-olds are the second largest age group utilizing robo-advisors at 30.6%. (Statista) 

Clearly, the growth of robo-advisors is only increasing—and if you’re a new investor, you have much to gain from utilizing them. Coming into the investment world for the first time can be overwhelming if you’ve never invested before, but robo-advisors can help fill those knowledge gaps and allow you to outsource your investing management to a professional for a low cost. 

Mutual funds and ETFs statistics

Like ETFs, a mutual fund is also a basket of securities that are bought and sold based on dollars instead of market share prices. 

The most recent data indicates that ETF ownership is strong so far for 2022. However, the same can’t be said in comparison to 2021, when U.S.-listed ETFs hit all-time records. 

This year’s lower demand for equity (stock) ETFs compared to 2021 might be attributed to rising interest rates, COVID-19 complications, and sustained global supply chain issues. 

99. In 2022, there are 2,952 ETFs listed in the U.S. (NYSE)
100. The average daily value of U.S. ETF transactions totaled $202.53 billion in June 2022. (NYSE)
101. The average daily volume of shares traded in the U.S. was 2.78 billion in June 2022. (NYSE)
102. Of U.S. adults with investments in 2022, 41% own mutual funds. (eMoney)
103. Long-term mutual funds and ETFs totaled a record $88 billion in December 2021. (Morningstar)
104. Americans invested $3 in ETFs for every $1 invested in mutual funds in 2021.  (ETF x BBH) 
105. By the end of 2021, ETFs reached $10 trillion in assets under management. (Morningstar x BBH)
106. 206 new ETFs launched in early July 2022, on track to align with 2021’s record of 450 launches. (Fidelity)
107.  Of the 206 new launches, 125 were actively managed ETFs. (Fidelity)
108. In early 2021, 16 mutual funds with over $40 billion in assets were converted to ETFs. (Fidelity)
109.  So far in 2022, eight mutual funds totaling $17 billion in assets have converted to ETFs. (Fidelity) 
110.  In 2022, 78% of investors report planning to expand more investments into active ETFs—up from 65% in 2021. (BBH)

If you’re deciding between an ETF versus a mutual fund, new investors can benefit from ETFs given their passive nature—meaning less effort is required to manage them. They also tend to be more cost effective than a mutual fund, making them ideal for younger investors who might not have as much capital to invest right away. 

Retirement investment statistics

Savings in retirement plan participants in the U.S. broke new records in 2021—growth that appears to be on track to continue into 2023. 

Part of the catalyst is the growing use of automatic solutions by retirement plan sponsors, which removes the friction of employees contributing to their retirement savings. 

Overall, defined contribution (DC) retirement plans dominate the private sector retirement system in the U.S., covering almost half of all private sector workers. 

111.  
112.  The total value of retirement assets in the U.S. reached $41.8 trillion in 2022, decreasing by 8.7% year over year. (SIFMA)
113.  The total value of U.S. individual retirement accounts (IRAs) reached $13.9 million in 2021, increasing 12.8% year over year. (SIFMA)
114.  Of all U.S retirement assets in 2021, 27.5% were IRAs, and 28.4% were in private pensions. (SIFMA) 
115.  Employer-sponsored retirement accounts are the second most popular type of investment account among Americans in 2022. (eMoney)
116. Retirement plans offering automatic enrollment have more than tripled since 2007. (Vanguard)
117.  76% of participants in Vanguard retirement plans were in plans with an automatic enrollment option in 2022. (Vanguard) 
118. Over 100 million Americans are covered by DC retirement accounts, amounting to $9 trillion in assets. (Vanguard) 
119.  For eligible employees with an annual income of less than $15,000, just 47% contributed to their employer’s DC retirement plan in 2022. (Vanguard) 
120.  By contrast, 95% of eligible employees with an income over $150,000 contributed to their employer’s DC retirement plan in 2022. (Vanguard) 
121. Retirement plan participation varies by industry—90% of employees in the finance, insurance, and real estate industries participated in their employer’s plan in 2022.  

If there’s one thing we can learn from stock market statistics, it’s that the market simply can’t be predicted. High inflation, soaring gas prices exacerbated by war tensions, and rising interest rates all contribute to the continued fall of riskier assets in Q2 2022, and investors are still trying to gauge how much longer the current bear market might last—and how much lower prices might fall. 

The good news is that consumer inflation rates are expected to level out over the next 12 months, and some of the most extreme supply chain issues are slowly easing up. Expected growth for stock earnings in the S&P 500 stands at 11% so far for 2022, higher than the average earnings growth rate of 2% in late-cycle periods seen since 1950. 

All that to say, none of these things can be answered definitively. And while stock market facts can lend a hand in forming predictions, only time will tell the true performance of the stock market for the remainder of 2024 and beyond. Our advice? Always ignore the short-term noise and think like a long-term investor. 

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Stocks classified as value stocks typically trade at a discount with the expectation that the value will increase over time, while those classified as growth stocks tend to sell at higher prices because they’re already seeing rapid growth. And because these classifications are determined by current market conditions, they may change. Keep in mind that value investing and growth investing strategies are not mutually exclusive. You can benefit from including both kinds of stocks in your diversified portfolio. 

What are value stocks?

Value stocks are shares trading at a bargain price, though that doesn’t necessarily mean cheap. In general, the stock price is a bargain when the shares are considered to be worth more than you’re paying for them. This may be the case when a company that has historically shown strong, stable performance experiences a dip in share value due to overall market conditions, volatility in its industry, or a temporary setback in the company’s outlook. So think of value investing as simply buying shares at an undervalued price. Value stocks tend to be less risky and often pay dividends. They’re usually issued by larger, more established companies that are temporarily undervalued, which contributes to their relatively stable reputation.

What are growth stocks?

Growth stocks are precisely what they sound like: stocks that are rapidly growing in value; they’re often expected to outperform the market, at least in the short term. You’ll often find them issued by companies that are getting a lot of media buzz and usually posting impressive earnings. Investor enthusiasm for these companies often translates into increased demand for their stock and investors’ willingness to pay more, which means higher share prices. As share prices rise, sometimes dramatically, the investors who own those stocks see higher returns. However, these stocks are more prone to volatility, so their prices can plunge or skyrocket rapidly, which leads to more risk for investors.  

Key differences: value vs. growth stocks

Growth stocks typically gain market momentum because the company is doing something new and exciting that drives up demand for shares, or has some sort of market advantage. Value stocks are often shares of a company whose stock price may be lower compared to its historical value, peers in the same industry, or the company’s potential for earnings growth. The differences between value stocks and growth stocks are further demonstrated by five key characteristics: price, P/E ratio, company earnings, risk, and dividends. 

Price

Stock prices are determined by how much buyers are willing to pay and the amount sellers are willing to accept. In general, growth stocks are perceived as overvalued, trading at higher prices than would be expected based on their price-to-earnings ratio. In contrast, investors see value stocks as undervalued by the market, believing that their true worth is higher than the current price. Investors expect the price of value stocks to increase, but not as aggressively as growth stocks. 

P/E ratio

The price-to-earnings ratio, or P/E ratio, is the ratio between a company’s stock price and its earnings per share. Investors use this figure to determine if what they pay for a stock is a good deal compared to the company’s expected performance. Investors generally prefer a lower P/E ratio, because they’ll spend less money for each dollar a company earns. However, investors may see a high P/E ratio as a signal that a stock’s value will continue to increase. Value stocks tend to have lower P/E ratios than above-average-performing growth stocks. 

Company earnings

As with the P/E ratio, the company’s earnings prospects tend to be lower for value stocks and higher for growth stocks. Growth companies often show potential for earnings growth even when overall economic conditions aren’t ideal. In the case of value stocks, the company’s earnings may not increase as much or as quickly, but they’re expected to rise over time. 

Risk

Growth stocks tend to be more volatile, making their performance less predictable and therefore more risky. The very conditions that drive their overvaluation can change rapidly, leading to rapid peaks and valleys in stock price. In comparison, relatively stable value stocks are less volatile. The lower share price of these companies is seen as a temporary dip that will be corrected in time, so value stocks are generally considered a more stable investment.  

Dividends

Dividends are one way investors can make money on their investments. These periodic payments provide a return regardless of fluctuations in a stock’s price. Not all companies pay dividends, but most value stocks do. Growth companies, however, tend not to pay dividends because they’re more likely to reinvest earnings back into the company instead of distributing them to shareholders. 

Value investing vs. growth investing: which is right for you?

Both value investing and growth investing strategies come with their fair share of benefits and risks. While one strategy may be more appealing to you based on your time horizon and risk profile, you’re not required to limit yourself to just one approach. Even well-known value investor Warren Buffett includes growth investing in his strategy. It’s all about evaluating the risk of value vs. growth stocks to find a balance that works for you.

Time horizon

Your time horizon, or how long you plan to hold onto an investment, can help you determine whether a growth or value investing strategy is the best fit. More stable value investments tend to be the right speed for investors with shorter time horizons that can’t accommodate the risk of sudden drops in their investments’ value. Undervalued companies may not regain their value overnight, but their share price can start rising, sometimes quickly, once they turn things around. Growth investing, on the other hand, may appeal to those with a longer time horizon because there’s time to ride out the potential ups and downs of a growth stock’s price. And even if a growth company’s share price continues to rise, it may take quite a while for it to realize its full potential, with possible stumbling blocks along the way. 

Risk profile

Factors like your age, current income, and savings goals can influence how you feel about risk. All investing comes with a certain amount of risk, but understanding how much you’re willing to tolerate helps you determine which investment strategy is right for you. Investors with an aggressive risk profile may feel more comfortable with the volatility of growth stocks, while conservative or moderate risk-takers may prefer the relative stability of value stocks.

Diversification 

It’s risky to put all your eggs in one basket, and the same is true for your investment portfolio. That’s where diversification comes in. Spreading the overall holdings in your portfolio across different asset classes can reduce your overall risk. Choosing a balance of growth and value stocks can play an important role in a diversified portfolio. By combining both value investing and growth investing, you could balance the risks of volatile stocks with more stable investments.  

How to identify value vs. growth stocks

Whether a company’s stock fits into the growth or the value category depends on the current market. For example, growth and value stock outlooks can change quickly if an undervalued company releases an innovative product, or if a rising star’s latest venture flops. When you want up-to-the-minute information to help you identify value vs. growth stocks and find potentially high-yield investments, bear in mind these three tips:

• Consult the Russell 1000 indexes, which were designed to provide investors with accurate benchmarks for measuring the growth and value of equity market segments.
• Look for undervalued stocks that have potential to regain their value and continue to increase.
• When looking at a company whose stock price seems like a bargain, evaluate its market cap to get a sense of its size, stability, and growth potential. 

Value vs. growth investing: find your balance

So what’s right for your portfolio when it comes to value vs. growth stocks? Maybe both. To keep your holdings diversified, you may want to invest in a mix of stocks, both classic solid bets that are momentarily undervalued and new, dynamic companies with high potential. Balancing growth stocks with value stocks in your portfolio may help maximize your potential returns while lowering the overall risk. It’s all about what makes the most sense for you and your financial goals. 

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While there are plenty of nuances to learn about the stock market and dozens of strategies investors could use, you have many options for becoming an investor, no matter what your budget. With online brokerage accounts and investing options like exchange-traded funds (ETFs) and fractional shares, you can start simple and small, with $100, $10, or even $1. Then you can build out your portfolio over time to meet your unique investing goals and increase your investments as you grow your income. 

In this article, we’ll cover: 

• Why you should invest in stocks
• What to consider before investing
• How to invest in stocks in 6 steps

Why you should invest in stocks

Why do people invest in the stock market? Most investors have two primary reasons to grow their money and to keep ahead of inflation. While there is always risk when you invest in stocks, it comes with some appealing advantages as well:

• Return on investments: There are two main ways investors earn a return on their stock purchases: increases in stock prices and dividends. You realize a return when you sell shares for more than you purchased them, and some stocks offer dividend payments every year, regardless of changes in the stock price.  
• Compounding: Compounding happens when the money you’ve earned on an investment itself earns additional interest or returns. When you reinvest returns, dividends, and interest from your investments, you amplify your earning potential by keeping that income invested instead of spending it. Try Stash’s compounding interest calculator to see how it works.
• Retirement planning: Investing is often the primary way people save for retirement. With a long timeline, tax advantaged retirement accounts, and compounding, investing can help you put away the amount you need for retirement by growing your money more than you could by keeping it in a regular savings account or hiding it under the mattress.
• Long-term financial security: With a historical average return of around 10% per year, the stock market can potentially provide earnings that outstrip what you could earn in interest in a savings account over the long term. And when your stock returns keep pace with or outstrip the inflation rate, your spending power is not diminished when you cash out your investments in the future. 

Things to consider before investing

Investing in stocks can be as basic or complicated as you want it to be. There are numerous investing guides and strategies to choose from, but how you invest is ultimately personal. You’ll want to match your investment strategy to your own timeline, goals, risk tolerance, and comfort. Remember, an investing strategy is only effective if it helps you reach your goals and you can stick to it. 

• What are your financial goals? People invest for various short- and long-term goals, such as milestones like purchasing a house, education expenses, retirement, and achieving overall security. Your financial goals will influence your timeline, risk tolerance, and investment strategy.

• What’s your risk tolerance? Investing in stocks comes with risks. The stock market is volatile; different stocks and sectors are prone to different levels of fluctuation in stock price. So, it’s important to understand your risk profile, i.e., how comfortable you are with different levels of risk based on your age, income, and investing timeline.

• How long do you plan to invest? Your investing timeline will largely depend on your goals. How far are you from retirement? When do you want to buy that house? The earlier you start investing, the longer your time horizon. Longer time horizons allow for more aggressive investment strategies because you have time to recoup any losses from stock market fluctuations. 

• Do you feel secure in your emergency fund? Building an emergency fund is an important part of your overall financial plan. When your car breaks down, your water heater leaks, or you run into other unexpected large expenses, your emergency fund allows you to cover them without having to take money out of your stock investments. That way, you don’t have to worry about needing to sell stock when the market is down or paying short-term capital gains taxes.

• Do you have any high-interest debt? If you’re investing regularly but still have high-interest debt, like credit card debt, you may be spending more on interest payments than you’re earning on investment gains. So prioritize paying down high-interest debt before focusing on your investment strategy.

• What does your budget look like? Making a budget you can stick to goes hand-in-hand with developing your investment strategy. You’ll want to ensure your monthly income covers all your expenses and set aside a portion for savings and investments. This allows you to invest regularly over time. 

How to invest in stocks in 6 steps

Now that you know the why, it’s time to get into the how. These six steps will walk you through the fundamentals of how to invest in stocks, so you can get started right away:  

1. Choose your investing style
2. Pick an investment account
3. Decide how much money you’ll invest
4. Choose what stocks and funds to invest in
5. Create a schedule and invest regularly
6. Monitor and track your portfolio

1. Decide what kind of investor you want to be

Before you start choosing specific kinds of stocks and funds for your investment portfolio, you’ll want to identify what kind of investor you are. This will help you form your strategy and identify how involved you want to be in your day-to-day investment decisions.

Consider questions like:

• Do you want to be an active or passive investor? 
• How much control do you want to have over your investments?
• How comfortable are you with risk?
• How stressful will it be for you to see losses?
• How much time can you dedicate to managing your investments?
• How much guidance do you need for investing decisions?

While there are a lot of investing strategies, there are two broad investor types: the DIY investor and the set-it-and-forget-it investor. 

Investment style #1: “I want to control my investments and choose what I buy.”

A DIY investor takes a hands-on role in building and managing their investment portfolio. These investors might go for investments that call for passive management, investing primarily in index funds, or go for securities that call for more active involvement by selecting individual stocks. Either way, they are most interested in having direct control of their investments. 

DIY investing is perfect for investors looking to reduce fees, have direct control over their investment decisions, access more stock choices, or grow their financial confidence. If this is the right style for you, you may want to consider the following:

• Open a brokerage account: A brokerage account is a taxable investment account you use to buy and sell securities through a licensed brokerage firm. You’ll need a brokerage account to buy and sell individual stocks, bonds, mutual funds, index funds, ETFs, and more. If you’re a DIY-style investor, you can just open an account and start selecting stocks and funds to buy.

• Learn more about the stock market: Even seasoned financial experts agree that understanding all the ins and outs of the stock market can be difficult. With a DIY investing approach, it may behoove you to start by brushing up on key stock market statistics to give you a baseline as you research different stocks and economic trends to guide your investing decisions. 

Investment style #2: “Set it and forget it. I want a hands-off approach to investing.”

Hands-off investing can be a useful strategy for investors who are less confident in their investing knowledge and those who don’t want to devote the time to do their own research. These investors are more interested in leaning on experts to handle their investment portfolio. While this style might come with higher fees and less direct control, it also provides access to more resources and less stress.

In addition to opening a brokerage account, you may want to consider a couple methods to get investing support if this is your style: 

• Hire a financial advisor: A financial advisor is an expert who helps you manage your money and understand your investment options. Advisors help you select investments that align with your goals, minimize taxes, and manage your portfolio. People with a complex financial situation or those who have a large amount to invest often go this route.  
• Choose a robo-advisor: Investors with more straightforward needs or who don’t want to pay a financial advisor’s fees may use a robo-advisor instead. A robo-advisor is one way investors go about automating their investing, essentially utilizing a computer program to algorithmically assemble an investment portfolio based on their needs and goals. Robo-advisors usually have lower fees, but you don’t get direct access to an actual person for investing advice. 

2. Open an investment account

For the most part, you can’t purchase stocks directly on the stock market; a licensed brokerage makes trades on your behalf. Brokerages run the gamut from brick-and-mortar firms with human financial advisors to app-based online brokerages with algorithm-driven robo-advisors, to stripped-down DIY online brokerages. The type of brokerage you choose depends on your investing style. 

You have a few different investment account types to choose from, with different functionality, limitations, and tax consequences. 

Taxable brokerage accounts

A taxable brokerage account allows you to directly purchase various investments, including individual stocks, bonds, and funds. Your brokerage might also offer options for investing in things like real estate, commodities, and cryptocurrency. You can invest as much money as you want, manage your investments yourself or rely on a financial advisor or robo-advisor, and often get started with a small amount of money. Brokerage accounts don’t offer any particular tax advantages, and you’ll generally have to pay taxes on the income you earn. 

Individual retirement accounts

If you’re investing for retirement, you may consider a tax-advantaged account like a traditional IRA or Roth IRA. IRS rules limit how much money you can contribute to an IRA each year, and you can’t withdraw from them until you’re 59½ years old without incurring a penalty. However, these accounts come with significant tax advantages. Both of these accounts are typically available as self-managed DIY accounts or as robo-advisor accounts for automated investing.

• With a traditional IRA, your tax-deductible contributions can lower your taxable income for the year, and you pay no taxes on funds while they’re invested. You’ll pay regular income tax on your money when you withdraw it.
  
• With a Roth IRA, your money is taxed before you contribute, and it grows tax-free while it’s invested. As long as you follow the IRS rules, you’ll pay no taxes on your earnings upon withdrawal. 

Custodial accounts (investment accounts for kids)

A custodial account is typically opened by a relative or guardian to invest money on behalf of a child. Custodial accounts generally work just like any other type of brokerage account, where you can use a DIY approach or robo-advisor, but the beneficiary cannot withdraw the money until they reach the age of majority, which varies by state. There are two types of custodial accounts: UGMA and UTMA. They are very similar: both may provide some tax advantages, and they allow you to invest in stocks, bonds, and funds. The main difference is that UTMA accounts can contain more types of investments, such as real estate and artwork.  

3. Choose how much you’ll invest in stocks

Everyone has different circumstances, income, and budgets to work with. Consequently, how much you should invest will vary heavily between different investors. 

Generally, experts recommend you invest around 10-20% of your income if you’re saving for retirement. But the more realistic answer is to invest what you can afford. You can start buying stocks with little money thanks to fractional shares, which let you purchase a just portion of a share. Even small investments made over a long timeframe will add up, whether you have $10 or $1000 to invest right now. Take the following factors into consideration as you decide how much you should invest in stocks at first:

• Understand your financial situation. Do you have a budget? An emergency fund? Debt? What’s your monthly income, and how does it compare to your expenses? Once you understand where you are financially, you can identify how much money you can dedicate to your investments.
• Set attainable investment goals. Whether you’re building up a retirement nest egg or are aiming for a medium-term goal like buying a house, determine how much money you’ll need for each goal and how much time you have to reach it. 
• Create a realistic investing plan. Then, pull it all together to decide how much money you’ll invest to start with, and the amount you’ll add each month. Remember that the longer your money is invested in the stock market, the more opportunities you have for it to grow, recover from any dips in share prices, and take advantage of compounding. 

4. Choose what stocks and funds to invest in

Now that you know where you’re investing and your budget, it’s time to invest in stocks. You can invest in several ways, including individual stocks, bonds, ETFs, and mutual funds. Each comes with different pros and cons: risk versus reward, impact on diversification, costs, and level of investor involvement.

Individual stocks

Stocks, or shares, are pieces of ownership of a company. When choosing individual stocks to buy, you’ll want to do some research to identify companies you expect to do well and have increasing share value. In addition to the company’s financial health and stock price, consider the sector and industry it’s in, as some are more sensitive to economic conditions, which can lead to higher volatility. Companies list their stocks on a stock exchange, and investors purchase them via their brokerage. 

Mutual funds

Instead of picking individual stocks, some investors prefer to invest in stocks through a fund. Mutual funds pool investors’ money and purchase a basket of securities, like stocks, bonds, and money market funds. Buying shares in a fund offers some built-in portfolio diversification because you’re investing in multiple securities at once. While you can buy mutual funds through many brokerage firms, you can also purchase them directly from the fund provider. 

Exchange traded funds (ETFs)

Like mutual funds, ETFs pool investors’ money and purchase stocks and other securities. However, ETFs function differently than mutual funds because investors buy shares from one another rather than from a mutual fund company. And while both types of funds may be actively or passively managed, ETFs are more likely to be the latter. Many ETFs are passively-managed index funds, which buy a mix of stocks intended to match the performance of a stock index like the S&P 500. Unlike mutual funds, you’ll have to purchase shares of ETFs through your brokerage. 

The pros and cons of mutual funds and ETFs are often similar, but there are a few key differences.

5. Set an investing schedule and continue to invest

Once you’ve gotten started with a brokerage account or retirement account, you can create an investing plan and schedule. Many people like to invest monthly, bi-weekly, or weekly, depending on how often they get paid. This helps you get in the habit of investing and build your portfolio over time, even if you don’t have much money to invest upfront. Automating your investments using an app or payroll deduction can help you stay on target without transferring money manually.

Investing a set amount of money at regular intervals also allows you to leverage the benefits of dollar-cost averaging, in which you automatically buy fewer shares of a stock when the prices are high and more when the prices are low. You might also participate in a dividend reinvestment program, or DRIP, so any dividends you earn are automatically invested in more securities. Both of these approaches support a passive investing strategy in which your investments can grow without a lot of hands-on management.  

6. Monitor and track your portfolio

As an investor, you’ll want to keep an eye on how your portfolio is performing over time. Checking in daily may simply increase your anxiety, as stock prices fluctuate frequently, but periodic reviews can help you ensure your investing strategy stays in line with your goals. Consider setting a money date with yourself to review your progress a few times a year. Don’t panic if the value of your investments decreases sometimes; the whole idea of investing in stocks for the long term is to allow for inevitable ups and downs.

Periodically, you may want to rebalance your portfolio. Many experts suggest doing so once or twice a year or if an asset class exceeds the ceiling you’ve set. Your brokerage may do it automatically, or you might have to take a more active role. There can be tax consequences to rebalancing, so you may want to check in with a tax professional to understand your options. 

Finally, it’s a good idea to rethink your investment strategy occasionally, especially when you have a major change in your life. You’ll likely find that your risk profile and investment goals change over the course of your life, and your portfolio can evolve with you.

Ready to invest in stocks? 

Learning how to invest in stocks might seem a bit overwhelming at first, but getting started doesn’t have to be. With a bit of reflection, you can identify your goals, risk tolerance, and investing style. Then it’s pretty straightforward to open a brokerage account and start your journey as an investor. 

Investing with Stash gives you lots of options, including fractional shares that allow you to start buying stock no matter how much money you have to invest, ETF options that help you build diversity into your portfolio automatically, and Smart Portfolios that help you find the right portfolio for your unique needs. The sooner you start investing, the more your money could grow. 

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The post How To Invest in Stocks in 2023: A Beginner’s Guide appeared first on Stash Learn.

Specific stock exchanges, like the New York Stock Exchange (NYSE) or the Nasdaq, act as marketplaces within the overall stock market. But investors will often use “the stock market,” “stock exchanges,” and “Wall Street” interchangeably to discuss the entire scope of securities trading. 

In this article, we cover: 

• What stocks are
• How the stock market works
• How to invest in the stock market
• Why people invest in the stock market
• Stock market FAQs

What is a stock?

A stock, also referred to as a share or equity, represents ownership of a fraction of a public company. Owning stocks makes an investor a shareholder and grants them a proportional claim to that company’s profits. That investor can then make money by selling a stock after its price increases or through earning dividends if a company offers them. 

There are two primary types of stocks: preferred and common stocks. Preferred stocks are less common, come with no voting rights, and are prioritized for a payout over common stocks. On the other hand, common stocks are considerably more typical, grant shareholders voting rights, and are normally paid last if a company has to liquidate assets. 

How does the stock market work?

A company will “go public” to begin selling shares on the stock market when they’re hoping to raise capital or expand their business. Companies will typically offer a limited number of shares during their initial public offering (IPO), and investors will then buy and sell those shares on the stock market.

Supply and demand will drive stock prices up and down because there are limited company shares on the market at any given time, and traders will determine the stock’s value. Buyers offer a “bid,” or the maximum they will pay, and sellers will offer an “ask,” which is the lowest amount they’re willing to sell for. A trade occurs when the buyer is willing to buy at the price offered. Investors can look at a stock chart to map how a stock’s price has changed over a period of time in order to gauge its overall performance. 

Most common U.S. stock exchanges

Stock exchanges are a fundamental component of how the stock market works; they are where shareholders and buyers can make their trades. These stock exchanges bring companies and investors together. Many people are familiar with the top three U.S. stock exchanges:

• New York Stock Exchange (NYSE)
• National Association of Securities Dealers Automated Quotations (NASDAQ) 
• Chicago Stock Exchange

There are also many large exchanges outside of the U.S., such as the Japan Stock Exchange (JPX), China’s Shanghai Stock Exchange (SSE), and the Toronto Stock Exchange (TSX) in Canada. Most brokerage firms give investors the ability to buy and sell stocks on international exchanges.

How to invest in the stock market

Individuals can’t buy stocks directly. If you’d like to invest in the stock market, you’ll need to open an account at a brokerage, which will make trades on your behalf. 

1. Select a brokerage. Your brokerage is your middleman who connects buyers and sellers and executes your trades. The brokerage you use defines what markets you can participate in and when/how frequently trades are executed.
2. Select an investment account. There are several types of investment accounts to choose from, including standard brokerage accounts, retirement accounts like IRAs, kids’ investment accounts, and education accounts. Different types of accounts come with different advantages, tax rules, timelines, and limitations. Many investors will have several different investment accounts to accommodate their different needs.
3. Fund your account. Depending on your goals for investing in the stock market, you may fund your account in several different ways. People who are investing for long-term goals like retirement often transfer money to their investment account on a regular basis. You can usually transfer money to your brokerage from a linked bank account, wire transfer money, deposit a check, or transfer investments from another broker. 
4. Choose what you want to invest in. Investors in the stock market have access to various potential investments, depending on the brokerage they choose. Investment types include specific stocks, exchange-traded funds (ETFs), mutual funds, and index funds. 

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Why people invest in the stock market

Most investors hope to put their money to work in the stock market to build wealth, hedge against inflation, or save for retirement. Over the long term, a well-diversified portfolio might help investors grow their money more compared to keeping it in a standard bank account. While investing in stocks has a higher risk than some other investments, the average stock market return has historically been about 10% per year, as measured by the S&P 500 stock market index. 

Stock market FAQs

1. Who regulates the stock market?

The stock market is regulated by the U.S. Securities and Exchange Commission (SEC). The SEC is an independent federal agency dedicated to protecting investors, maintaining fair and efficient markets, and facilitating capital formation.

2. What is a stock market index? 

A stock market index isn’t an actual marketplace like a stock exchange. Instead, it’s a measuring tool used by investors to understand the overall behavior of the market by tracking specific stocks. Three of the most well-known indexes in the U.S. are:

• The S&P 500 Index: a market-capitalization-weighted index of 500 leading publicly traded companies on the NYSE or Nasdaq stock exchange.
• The Nasdaq Composite Index: a market-capitalization-weighted index of around 2,500 stocks listed on the Nasdaq stock exchange.
• The Dow Jones Industrial Average Index: an index that tracks 30 large, blue-chip companies trading on the NYSE and Nasdaq.

Investors often reference these indexes to judge how the stock market is doing overall. Indexes are also used to create index funds that aim to match the performance of a specific index, like the S&P 500.   

3. When does the stock market open and close?

The NYSE and Nasdaq are typically open Monday through Friday, 9:30 a.m. to 4:00 p.m. Eastern Time. Both stock exchanges are generally closed evenings, weekends, and holidays. Sometimes, external forces such as severe storms, global disasters, or potentially catastrophic stock price drops can cause the markets to close early. 

4. How do you lose or earn money in the stock market?

Investors earn money on the stock market in two primary ways:

• When they sell a stock for a higher price than they purchased it
• By receiving dividend payments if a company offers them

A common way investors lose money in the stock market is when they sell shares at a lower price than they initially paid. They can also lose money if a company they’re invested in declares bankruptcy without enough money to pay out their shareholders. 

5. What is volatility?

Volatility is a measure of risk that refers to how much the price of an investment tends to change over time. The stock market is considered volatile because stocks experience price changes every day. Some stocks experience more extreme change more quickly (higher volatility) than others, and different stock market sectors tend to have varying levels of volatility overall. A diversified portfolio can help investors reduce volatility because it spreads risk across a number of different types of investments.

5. What is diversity in investing?

A well-diversified portfolio aims to reduce overall risk by spreading investments across different types of assets, such as stocks, bonds, and funds. By splitting your portfolio across investments that behave differently, you reduce your vulnerability to the risk tied to any single asset. When investing in the stock market, you can diversify your holdings by investing in a variety of sectors, industries, and types of companies so that a poor outcome from one company doesn’t significantly impact your overall profits. 

Start investing in the stock market

Once you understand what the stock market is and how to invest in it, you’ll want to put together an investment strategy that matches your specific goals, income, timeline, and comfort with risk. You might want to read up on stock market terminology and interesting statistics to deepen your understanding and build your confidence.

Ready to become an investor? Stash offers a suite of automated investing tools and self-directed investment options to get you started. 

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The post What Is the Stock Market and How Does It Work? Everything You Need to Know appeared first on Stash Learn.

In this article, we’ll cover:

• How stock splits work
• Different types of stock splits
• Reasons behind stock splits
• What stock splits mean for shareholders

How stock splits work

Stock prices are usually determined by supply and demand among buyers and sellers. Stock splits decrease the cost of individual shares while simultaneously increasing the number of shares available. This creates an inverse relationship between the decreased stock price and the increased number of outstanding shares. Existing shares are divided into multiple smaller units, resulting in a higher overall count of shares available in the market. Shareholders wind up with a larger number of shares with a lower value per share, but the value of their investment doesn’t change.  

A stock split does not affect a company’s market cap. Market cap is determined by multiplying the price per share by the number of shares outstanding. When a company goes through a stock split, the number of shares increases and the price per share decreases by a proportional amount, leaving the market cap the same.

Example of a stock split in action

Say you own four shares of stock in a leading healthcare company called ABC Med. The current stock price is $400 per share, making the total value of your investment $1,600 (4 x $400 = $1,600). 

ABC Med announces a 2-for-1 stock split, meaning the number of available shares will double, while the price of each share will be halved. ABC Med will give you two shares for every share you already own. 

After the split, you will own eight shares with a price per share of $200. Your total investment value will remain $1,600 (8 x $200 = $1,600), and ABC Med’s market cap will remain unchanged. 

Different types of stock splits

Stock splits come in multiple forms, but some of the most common include 2-for-1, 3-for-1, and reverse stock splits. Google’s parent company Alphabet even initiated a 20-for-1 split in 2022, offering investors twenty new shares for every existing single share. Regardless of the ratio, each of these different types of stock splits will change the number of shares you own while retaining the overall value of your investment.

2-for-1 Stock Split

In a 2-for-1 stock split, you will receive two new shares for every one share you currently own. While the number of shares you own will double, the price for each share will be cut in half. A company may opt for a 2-for-1 split to increase liquidity, broaden investor participation, or create the perception of a more affordable stock to attract new investors. 

3-for-1 stock split

A 3-for-1 stock split is structured similarly to a 2-for-1 split. For every existing single share you own, the company will give you three new shares. The individual stock price will decrease to ⅓ of its previous value, but you will receive three times the number of shares. 3-for-1 stock splits increase liquidity even more than 2-for-1 splits and make shares even more affordable, which can be attractive to smaller investors. 

Reverse stock split

A reverse stock split is just the opposite of a regular stock split. Instead of receiving more shares at a reduced price, investors receive fewer shares at a proportionally increased price. Reverse splits are often used to avoid delisting from exchanges when a company’s stock price falls too low. Reverse stock splits aim to boost the stock price and prevent negative perceptions often associated with very low stock prices. 

Reasons behind stock splits

Stock splits generally occur to enhance liquidity, make shares more affordable, attract more investors, or signal the company’s confidence in its future prospects.

Enhancing liquidity 

Liquidity refers to how quickly an investment can be sold without having an impact on its value. Having an increased number of shares available after a stock split makes it easier for investors to buy and sell them without impacting the value. Thus, stock splits can lead to improved market liquidity. Enhanced liquidity can also narrow the bid-ask spread between buyers and sellers, making investing more cost-effective.

Making shares more affordable 

High stock prices can act as a barrier to potential investors, particularly those who are new to investing or have limited funds. Stock splits make shares more affordable, thereby allowing a broader range of investors to participate. 

Attracting more investors 

Lower-priced shares have the potential to attract casual investors who are more likely to invest smaller amounts of money. The lower cost following a stock split allows smaller investors to purchase shares in multiple companies, which can support better portfolio diversification.

Positive signal to the market 

Companies may announce a stock split as a way to send a positive signal to the market. Stock splits might imply that a company is in a growth phase and expecting stock prices to increase soon. If the company is projecting confidence in its future prospects, chances are that investors will take notice, which can boost confidence in the company’s prospects and potentially increase trading of its stocks.

Famous stock split cases

Apple, one of the most highly valued companies in the world, has split five times since the company went public in December of 1980. Its most recent split occurred in August 2020 on a 4-for-1 basis. Other splits include 7-for-1 in June 2014, and 2-for-1 splits in February 2005, June 2000, and June 1987. Another highly valued company, Amazon, has split four times since 1998, with its most recent 20-for-1 split occurring in June 2022. Often, these splits were intended to make the stock more accessible and attractive to new investors. 

What stock splits mean for shareholders

The most important thing to remember is that while the number of shares you own and the price of those individual shares will change as a result of a stock split, it will have no impact on the market value of the company or the value of your investment. The share price is adjusted proportionally to the split ratio, and shareholders receive additional shares based on that split ratio. 

The impact of a stock split can differ for short-term traders vs. long-term investors. Long-term investors typically focus on the company’s fundamentals and performance history rather than the split itself. But if a stock split generates more interest among retail investors, there’s a chance it could increase demand, driving up share prices over time; that may be a benefit for shareholders who hang onto their stocks over the long term. Short-term investors who intend to sell shares sooner rather than later aren’t likely to see a benefit from a stock split, since the value of assets remains the same. That said, it’s possible for a stock split to trigger volatility and trading volume, which could increase or decrease the stock price in the short term.  

What is a stock split’s impact on your investing strategy? 

Stock splits are neither inherently good nor inherently bad for investors, but they do happen. If you’re looking for a lower-cost entry into the stock market, purchasing shares after a split could allow you to buy stocks that may have been out of your budget before. And if you’ve purchased stock just before a split, be aware that you may see some volatility in the short term and avoid panicking. 

Stash can help you learn how to start investing, understand the potential risks and rewards, and gain confidence as you navigate your way toward building long-term wealth.

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The post What Is a Stock Split? appeared first on Stash Learn.

In this article, we discuss: 

• How stocks work
• Types of stocks
• Pros and cons of stocks
• Considerations for buying stocks

How stocks work

Investors who own stock in a company become shareholders, which gives them a claim to a portion of that company’s profits. Companies typically issue a limited number of shares that will be available when they first “go public” during their initial public offering (IPO). These shares are then traded among investors who are buying and selling on the stock market. The price of these shares will rise and fall depending on supply and demand, as well as other market factors. 

But what are stocks supposed to do for investors? Well, once they’ve purchased shares, investors can earn money in one of two ways:

• The stock’s price goes up. Investors can sell shares at a profit if the stock price increases after they buy. As a business’ value fluctuates, the value of the stock fluctuates with it. Consequently, the value of an investor’s stock holdings will fluctuate over time. 
• The stock pays dividends. Dividends are payments made to shareholders from a company’s profits. These payments provide an opportunity for profit regardless of whether your shares increase in value. Not all companies offer dividends; those that do typically pay them quarterly. 

Types of stocks

There are two primary types of stocks: preferred and common stock. Both types represent investor ownership in a company, but they have some distinct differences. 

• Common stock: These shares are the most common type offered by companies and purchased by investors. They grant shareholders ownership rights in a company, usually come with voting rights, and their value typically comes from growth in share price. Common stocks tend to outperform preferred stocks but are considered higher risk.
• Preferred stock: These shares combine characteristics from stocks and bonds. Unlike common shareholders, preferred shareholders have rights to company profits but generally have no voting rights. Preferred stocks are prioritized over common stocks when dividends are paid and assets are distributed, so they are typically lower risk but have a lower potential for long-term growth.

Pros and cons of stocks

Investors primarily buy stock to earn a return on investment and grow their wealth, especially in the long term. But investing in the stock market comes with both potential benefits and notable drawbacks.

Pros of owning stocks 

• Possibility for returns: Investors can earn money through long-term investing in stocks, especially because of the impact of compounding returns. Historically, the stock market has an average 10% return, which is higher than what can typically be earned through bonds or interest on savings.
• Possibility of earning dividends: Investors who receive dividends can either reinvest them to build their portfolio in the long term or use them as a regular stream of passive income.
• Liquidity: Your shares are liquid; you can sell them anytime for quick access to your money if you need it. That said, you’ll want to be aware that the stock market can be volatile, so you always run the risk of selling at a loss. 
• Variety: Investors in the stock market have access to a wide variety of potential investments, including exchange-traded funds (ETFs), mutual funds, and index funds in addition to individual stocks. You have a lot of room to build a well-diversified portfolio that matches your risk tolerance. 
• Ease of purchase: Once you’ve set up a brokerage account, investing in the stock market is easy. You can work with a broker directly to advise you on your investments, use a robo-advisor for automated guidance, or self-manage your account online. You can even automate your investing for a hands-off approach.
• Low cost to get started: You can start investing with whatever amount of money works for your budget. Many brokers allow you to buy fractional shares so you can gain a stake in companies whose share prices are too expensive for you to purchase a full share right away.

Cons of owning stocks

• Risk of losing money: Investors can lose money, even their entire investment. Share prices can fall dramatically and businesses can go under, leaving investors with big losses, and there is no guarantee they’ll make that money back. This risk can be minimized with a well-diversified portfolio, but it can’t be fully avoided.
• Common shareholders get paid last: If a company goes bankrupt, there’s a chance common shareholders won’t get paid. Creditors and preferred stockholders get priority in the case of liquidation. 
• Taxes: Profitable stock sales are subject to taxes, and some of your earnings will likely go toward capital gains tax when you turn a profit. 
• Emotional buying and selling: The stock market is volatile, and prices rise and fall regularly. This can be emotionally difficult for investors who are risk-averse or stressed by seeing red in their portfolio.

Considerations when buying stocks

How you invest in stocks will be unique to your specific needs, timeline, and goals. To choose the best investing strategy for you, you’ll want to consider several key factors, including:

• Market factors like the volatility of the economy, sectors, and companies you’d like to invest in
• The amount of risk you’re comfortable with
• Your investing goals and timelines for reaching them
• Your cash flow, any existing investments, and predicted future income
• Your short-term and long-term investing goals
• How investing affects other financial priorities like getting out of debt or building an emergency fund

As your goals, income, and lifestyle change, so will your investment strategy. You may want to revisit your portfolio periodically to rebalance and adjust your approach, especially when you experience big life changes like relocating, switching jobs, or changing marital status. 

How to buy stocks

Stocks are sold on the stock market, a broad term representing all the shares available in a particular country. The stock market is made up of exchanges, and the U.S. has three major stock exchanges: 

• The New York Stock Exchange (NYSE)
• The Nasdaq Stock Market (NASDAQ)
• The Chicago Stock Exchange

Investors will trade stocks through a brokerage by opening an account, transferring money, and selecting and purchasing individual stocks, mutual funds, ETFs, or index funds. 

Shares can be purchased through several different types of accounts, including standard brokerage accounts, retirement accounts like a 401(k) or IRA, and educational accounts. 

If you want to start investing in stocks, be aware that you cannot purchase them directly on an exchange; a licensed broker must make the purchases on your behalf. There are many options for brokerage firms, from brick-and-mortar companies to online platforms and apps.  

The role of stocks in your investment portfolio

Stocks generally represent the higher-risk, higher-potential-return portion of your overall investment portfolio. Many investors offset this risk with lower-risk investments in things like bonds and index funds. 

How you allocate your investments among stocks and other securities depends on your risk tolerance and your timeline for reaching your financial goals. Risk-averse or close-to-retirement investors often tend to invest in lower-risk, lower-potential-reward stocks and dedicate a larger portion of their portfolio to bonds. Investors more comfortable with risk or with more time before retirement may go for a larger proportion of high-risk, high-potential-reward stocks because they have more time to ride out market volatility.  

Get started investing in stocks

New investors often find themselves overwhelmed at the prospect of investing in stocks, but you can dip your toe in and learn as you go. As you deepen your understanding of what stocks are, how they work, and the risk involved, you’ll likely gain more confidence. It’s okay to start small and get comfortable before fully diving in. There’s an investing strategy for everyone, and the earlier you start, the more your money could grow. 

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The post What Are Stocks, Exactly? How Do They Work? appeared first on Stash Learn.

As complex as the stock market may be, even the most novice investors can start investing in stocks in a few simple steps. So, where do you begin with how to buy a stock? All it takes is five steps:

• 1. Choose an online broker 
• 2. Research potential stocks to buy 
• 3. Determine how much you can invest 
• 4. Pick a stock order type and place your trade
• 5. Optimize your stock portfolio and build wealth over time

Now, let’s dive into how to buy stocks for beginners, shall we? 

1. Choose an online broker  

To get started, you might be wondering where to buy stocks. You’ll need to open an account with a brokerage, which is the firm that facilitates buying and selling of your stocks and other investments. You deposit money into your brokerage account, and your brokerage uses those funds to buy and sell stocks on your behalf.

Brokerage account options run the gamut from full-service firms with professional advisors to robo-advisors and online brokerages.

Full-service brokerages

Best for: high-net worth individuals and those with limited investment knowledge

Full-service brokerage firms offer a comprehensive range of financial services, including personalized advice from professional financial advisors. These advisors work closely with clients to understand their financial goals, risk tolerance, and investment preferences. They then create tailored investment strategies and actively manage clients’ portfolios, making adjustments as needed based on market conditions and changes in financial goals.

Online brokerages

Best for: self-reliant investors seeking more control

Online brokerages are digital platforms that allow investors to buy and sell securities, including stocks, bonds, and ETFs, on their own. These platforms offer a wide range of investment options and tools to assist investors in making informed decisions. Online brokerages are perfect for investors looking for more control over their investment portfolio as well as those seeking lower fees.

Robo-advisors

Best for: new investors and passive investors

Robo-advisors are a great option for automating investing for new investors starting to build portfolios and passive investors interested in a hands-off approach. Robo-advisors are automated platforms that use algorithms and artificial intelligence to build and manage investment portfolios. These platforms rely on users’ input, such as risk tolerance, investment goals, and time horizon, to create diversified portfolios of low-cost exchange-traded funds (ETFs) or index funds. 

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That said, online brokerages are a simple and convenient way to get started as a beginner investor, and you can get signed up in just a few minutes. Many come with low fees and options for commission-free stock trading, so you won’t need a ton of capital upfront. 

To get started, you’ll need to submit an account application and share some basic information like proof of identification, your Social Security number, and your bank account numbers. 

2. Research potential stocks to buy 

Once you have a funded brokerage account up and running, it’s time to decide what stocks to buy. 

Buying a stock means buying a share of ownership in a company (as a reminder, a stock is a piece of ownership in a company, and those individual pieces are called shares), and the value of the shares you choose rise or fall depending on the company’s performance. Because of this, you’ll need to do some research into the potential companies you want to buy stock in. Neglecting research could expose you to unnecessary risks and may result in investing in companies that don’t align with your financial goals.

With thousands of different companies to choose from, researching stocks might seem daunting. But by paying attention to a few key metrics, you can get a grasp on the company’s performance, and in turn, the potential of your investment. 

All publicly traded companies must file information about their performance each quarter with the Securities and Exchange Commission (SEC), which is packaged in a publicly available earnings report. You can find reports on any publicly listed company through the SEC’s search tool. 

Once you’ve identified a company you want to research, here’s what to pay attention to: 

• Revenue: a company’s revenue offers a high-level view into whether or not they’re growing. Companies whose revenue has increased over time is a positive sign of business growth. 
• Net income: this is a company’s profits after subtracting things like production expenses, debt payments, and revenue taxes. A high-revenue company with a weak net income is a negative sign. 
• Earnings per share (EPS): EPS is a company’s profit divided by its number of shares that are available for sale to the public, and is used to gauge how much money a company has to invest in its operations. An increasing EPS indicates positive profitability.
• Price-earnings (P/E) ratio: this is used to determine the market value of a stock compared to the company’s earnings. A high P/E ratio suggests investors are willing to pay a higher share price due to the company’s anticipated future growth. But a high P/E could also mean that a stock’s price is high relative to its earnings, and possibly overvalued. 

In addition to analyzing earnings reports, also consider non-numerical information like company press releases, recent company news, and annual letters to shareholders. Together, this information will help you make a more informed prediction about how a company’s shares might perform. 

Ultimately, thorough research empowers you to make sound investment choices and positions you to navigate the stock market with confidence. It allows you to make investment decisions based on data and analysis rather than emotions and speculation.

3. Determine how much you can invest 

Determining how much you can invest depends on your financial situation and investment goals. You might start small by purchasing a single share in a company—or you can start even smaller with fractional shares, if your brokerage offers them. These let you buy a portion of a single share that may otherwise be out of your budget. For example, if a stock costs $500 per share, you could buy a one-tenth fractional share for just $50. 

If you don’t yet have an emergency fund, it’s smart to build that up (aim to save at least three to six months’ worth of expenses) before investing a large sum in stocks. If you have any high-interest debt, you may also want to prioritize paying that down first. 

Once you have those bases covered, you can gauge the right amount to contribute to investments—10%–15% of your income is a good starting point, but there’s no right or wrong answer. Some start by investing an affordable lump sum and incrementally adding to it each month through a dollar-cost averaging strategy. Others dedicate annual lump sums of money, like tax refunds and bonuses, to their investment fund.

4. Pick a stock order type and place your trade

If you’re using a robo-advisor, you won’t need to worry about this step, as they’ll handle it for you. Otherwise, you’ll likely need to place the order yourself. To do so, you’ll need to specify an order type: a market order or limit order. 

• Market order: a market order instructs your broker to buy the stock immediately at the current best available price. This is often the default order of choice for most investors. It ensures the order will be executed, but doesn’t guarantee a specific price. 
• Limit order: limit orders allow investors to set a maximum acceptable purchase price, meaning the trade will only be executed at the specified price or better. If the stock fails to reach that specified price before the order expires, the trade is canceled. 

Market orders are generally the most common choice, and are suitable for long-term investors whose main goal is ensuring the trade is fully executed rather than assessing small price differences. Limit orders offer more control over the price of your trade, and are typically favored by short-term investors looking to time their trades or buy shares with highly volatile prices. 

5. Optimize your stock portfolio and build wealth over time

Investing in stocks isn’t a set-it-and-forget-it type of process. Periodically check in on your investment and continue to stay aware of the company’s performance—consider setting aside time each quarter to review quarterly earnings reports and balance sheets and take stock of any relevant industry news. As you gain confidence with the process, you’ll be able to make more informed decisions about allocating more (or less) toward your original investment or deciding on additional stocks you want to buy. 

Once you’re familiar with how to buy stock, keep in mind there are other investment options available to further diversify your portfolio, like index or mutual funds. A mutual fund is a basket of hundreds of stocks within a single fund that provides broader market exposure compared to a single stock, and removes the intensive research required to analyze individual stocks. 

Similar to how one might set up an auto-draft to send a portion of their income to savings each month, dollar-cost averaging invests the same dollar amount every month. 

Instead of fretting over the right or wrong time to buy stocks, dollar-cost averaging allows investors to make a disciplined habit of investing on a regular basis. By doing so, you can make investing a routine that adds up in the long term, despite the presence of market volatility. 

Ultimately, the best way to buy stocks is the way you’re most comfortable with, but dollar-cost averaging is also ideal for investors who are just starting out. You might not have much to invest right now, but you’re better off investing what you can consistently than putting it off until you build up your balance. 

Learning how to buy and sell stocks might seem complex at first, but getting started is quite simple. Once you know the basics of researching potential stocks and have an idea of how much you want to invest, you’ll gain confidence quicker than you might think. There’s a brokerage out there for everyone, and the sooner you make your first investment, the faster your money can grow. Still trying to decide on the best investment for you? Check out our guide to cryptocurrency vs. stocks next.

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FAQs about how to buy stocks 

Buying stocks for beginners can be intimidating. Find answers to any lingering questions you have about how to buy stocks below.

How can I buy stocks online without a broker? 

You don’t have to work directly with an actual broker to buy stocks online—online brokerages can do that for you. While you don’t need a hired broker, you do need a brokerage, which is simply the firm that administers the buying and selling of stocks. You can also find companies that offer a direct stock purchase plan, although it’s less common. 

How much money do I need to buy stocks? 

Technically, there’s no minimum amount required to buy stocks. Many online brokerages allow you to start investing with no account minimums or transaction fees, so the amount you’d need to buy stocks could be as low as a $10 single share.

Is now a good time to buy stocks?  

For long-term investors, the best time to buy stocks is as soon as possible—regardless of the current state of the market. A passive buy-and-hold strategy has historically provided greater returns over time than any short-term strategy, and a longer time horizon gives you more time to make up for any short-term losses. 

Are stocks and shares the same thing?  

While stocks and shares are often used interchangeably and many people think they refer to the same thing, they’re technically different. Stocks represent pieces of ownership in one or more companies, while shares more specifically represent pieces of ownership in one particular company. 

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• Common stocks are, as the name implies, the ones most commonly purchased by investors and most frequently offered by companies. These stocks grant common shareholders ownership rights in the company, and their typical value comes from growth in share price. They’re seen as higher risk than preferred stocks.

• Preferred stocks combine characteristics of common stocks and bonds. They pay shareholders a specified dividend and give them priority over common stockholders for receiving dividends, but typically don’t come with voting rights in the company. 

By understanding how these two types of stock differ, you’ll be more equipped to decide which makes the most sense for your risk tolerance and investing goals.

In this article, we’ll cover:

• Common stocks
• Preferred stocks
• Deciding which is right for you

What is common stock?

Common stock is a type of security that represents ownership in a company. Common stockholders typically get voting rights in company decisions, usually one vote per share. Some common stocks pay dividends, but the primary way in which investors can earn a return on common stock is through the growth in share price over time. 

Common stocks can appeal to investors because they tend to have higher long-term growth potential than preferred stock or bonds and are the most frequently available type of stock. However, this growth potential comes with risk. Common stockholders have the lowest priority for receiving dividends, as well as any payouts if a company liquidates, so the chances of losing your initial investment or not receiving dividends are higher for common than preferred stock. 

Types of common stock

Broadly, common stock falls into two categories: voting and non-voting. These are differentiated by the voting rights you get with ownership and typically have a relatively small price differential. 

• Voting common stock: Investors who hold voting common stock can vote in shareholder meetings, including the option to vote by proxy. This is the most typical type of common stock.
• Non-voting common stock: Non-voting common stock is a stock in which the shareholder does not have voting rights. These stocks are usually offered when a company wants to raise new capital from investors without offering control over business decisions. 

Pros and cons of owning common stock

Investors generally buy common stock in the hopes of earning a return when the price appreciates or through dividend payments if the company offers them. This comes with higher volatility, higher risks, and higher potential returns than preferred stocks or bonds.

What is preferred stock?

Preferred stock is a type of equity that shares characteristics with both common stocks and bonds. Preferred stockholders are given preference over common stockholders when dividends are paid and assets are distributed. While they have rights to a company’s profits, they generally have no or limited voting rights in corporate governance. 

The most significant appeal of preferred stock to investors is often the higher priority for dividends, making them a good source of predictable income. Dividend payments are prioritized over those for common stockholders, generally yield more, and are generally paid monthly or quarterly. 

That said, preferred stock tends to have a lower potential for long-term growth than common stock. Preferred stock is initially priced based on par value, which is the value of the share set by the corporation’s charter, and is not typically related to the value of the company’s common stock being traded on the market. The price of preferred stock is usually tied to interest rates, so it generally changes slowly, making it less volatile but also limiting how much it can increase. 

Types of preferred stock

Not all preferred stocks are the same. The different types come with their own advantages and disadvantages that may suit different types of investors and investment goals. 

It’s also worth noting that not all companies offer all types of preferred stocks. Many companies do not offer preferred stock at all, so your investment options are more limited than when investing in common stock.

• Cumulative preferred stock: This type of preferred stock requires that any dividends missed in the past, like when a company has a negative stockholder’s equity and can’t afford to pay debts for one or more payment periods, are paid out to the cumulative preferred shareholders first. These shareholders are entitled to missed dividend payments before other preferred stockholders or common stockholders receive any payments.
• Non-cumulative preferred stock: Non-cumulative preferred stockholders are the contrast of cumulative preferred stockholders. These investors have no rights to unpaid dividends, which means that if a company misses dividends, these investors will not receive a make-up payment later.
• Convertible preferred stock: Convertible preferred stocks allow a shareholder to trade their preferred stock for common stock. In most cases, this exchange can happen whenever an investor chooses, but once shares are converted to common stock, they cannot be converted back to preferred stock. 
• Participating preferred stock: Participatory shares guarantee additional dividends should an issuing company meet predetermined financial goals. Investors who hold participating preferred stock are entitled to the same dividends as other preferred stockholders, plus additional profit opportunities.  
• Callable preferred stock: Callable shares are preferred shares that can be bought back by the issuing company at a fixed price in the future. This has the effect of putting a cap on the value of the stock, limiting a company’s maximum liability to preferred shareholders. 
• Adjustable-rate preferred stock: Adjustable-rate preferred stock (ARPS) is a type of preferred stock where dividends issued will vary based on a benchmark rate, which is often the T-bill rate. Modifications to the dividend are based on a predetermined formula and usually take place quarterly. 
• Perpetual preferred stock: Investors with perpetual preferred stock are entitled to a fixed dividend for as long as the company remains in business. These stocks do not have a maturity, but they can be bought back by the issuer.

Pros and cons of owning preferred stock

Preferred stocks are a unique hybrid between common stocks and bonds, and they come with distinct advantages and disadvantages. Investors often choose preferred stocks because they provide predictable passive income through dividend payments and prioritization over common stock. Some investors may also have a preference for the stability of knowing their shares will typically remain worth the par value even if the share price of common stock drops below it. But that lower volatility also means shares are less likely to gain significant value.

Preferred vs. common stock: which is right for you?

Both preferred stockholders and common stockholders gain ownership in a company by purchasing shares, and both types of stock are tools investors can use to try to profit from a company’s growth and success. The most significant differences lie in voting rights, dividends, payment priority, and growth potential.

Preferred stock is less volatile than common stock but tends to provide lower long-term returns. Common stock, on the other hand, provides more significant potential for long-term gains but is also exposed to higher risk.

Deciding between the two stock types may come down to your risk tolerance, investment time frame, and investment goals. Factors to consider when choosing preferred stock vs. common stock:

• Voting rights: Common stockholders usually have voting rights, and preferred stockholders typically do not. If having a say in a company’s business decisions matters to you, common stocks may fit your needs. 
• Dividends: Preferred stockholders are generally paid a fixed dividend, prioritized over common stockholders’ dividends. Because common stock doesn’t always pay dividends and is the lowest priority for payout, preferred stock may make sense if you’re looking for a predictable, steady income stream. Consider common stocks if you’re willing to take on more risk for potentially higher returns and are looking for long-term investments. 
• Priority in payment: If a company cannot pay out dividends to all investors, or if they go bankrupt and liquidate assets, preferred stockholders have priority over common stockholders. If a more stable investment appeals to you, preferred stock may be a good fit.
• Risk tolerance: Preferred stocks are typically less volatile and thus less risky, with lower potential gains than common stocks, making them appealing to investors with a lower risk tolerance. You might consider common stock instead if you are less risk-averse or have a longer investment window during which your investment could grow. 
• Price: Preferred stock often has a lower price than common stock, and price volatility is usually lower too. Common stock has more potential growth, but stability is lower and share prices can be higher. If you’re looking for an investment at a lower price point, preferred stock may make more sense. If you’re looking for more growth potential, common stock tends to provide higher long-term returns. 
• Market conditions: Because they get paid first in the case of liquidation, and prices are more stable, preferred stockholders are at less risk than common stockholders in times of economic uncertainty. Common stockholders, on the other hand, benefit more during economic booms since they see more value when stock prices rise.

How to start investing in stocks

Whether you invest in preferred stock vs. common stock depends on your risk tolerance, investment strategy, and goals. And you don’t have to choose just one; there may be advantages to owning both types as part of a diversified portfolio containing different kinds of stocks, mutual funds, exchange-traded funds (ETFs), and bonds. 

When you’re ready to start investing, Stash can make it easy with the Stash Smart Portfolio, giving you automated investing options tailored to your goals. You can sign up online and become an investor with any dollar amount. 

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What is a shareholder? Simply put, a shareholder is any individual who owns stock in a given company. You can become a shareholder in a company simply by investing in it through the purchase of its stock. But it’s important to understand the nuances of what a shareholder is before you invest. That includes all the types, rights, responsibilities, and risks that relate to this role.

• Types of shareholders
• What it means to be a shareholder
• Pros and cons of being a shareholder
• How to become a shareholder

Types of shareholders

Though the basic definition is straightforward, there are several distinct types of shareholder, and the category into which you fall affects the rights you have as an investor.  In general, these categories are separated by the type and amount of stock you own. 

In terms of amount, majority shareholders are those who own 50% or more of a company’s stock, while minority shareholders possess less than 50%. Fractional shareholders who own less than one full share of stock in a company may, in certain jurisdictions, be entitled to limited rights relative to those who own one or more complete shares.

Another way to categorize shareholders is by the type of stock owned; this is the categorization that’s relevant to most everyday investors. 

• Common shareholders are those who own common stock and typically represent the vast majority of a company’s shareholder body. Common stockholders can buy and sell their shares on a stock exchange, and they receive the right to vote on company matters. If the company pays dividends, common shareholders receive amounts that correspond to the company’s share price when such payouts are made, but they receive those payments after preferred shareholders.
  
• Preferred shareholders own preferred stock, which is a type of equity security that shares characteristics of both common stocks and bonds. While preferred stocks are traded on exchanges, the market for them can be small because many companies do not issue this type of stock. Preferred shareholders receive dividends in fixed amounts in perpetuity, providing a source of steady income Preferred shares may be redeemed, or bought back by the company, at certain times, whereas common stock is owned by the shareholder and may not be redeemed. Preferred shareholders do not have corporate voting rights, but are paid before common shareholders when dividends are paid out and when assets are distributed following a liquidation. 

What it means to be a shareholder

Owning shares of a company’s stock represents more than just the potential to profit or lose capital as a result of its changing valuation. When you invest in a company’s stock, you essentially become one of many co-owners. And just like owning a home, a vehicle, or anything else, that ownership is accompanied by certain rights and responsibilities.

Shareholder rights

By law, shareholders are entitled to several protections and privileges. These rights help protect investors, reduce fraud, inform sound decision making, and support a competitive economic landscape. Though the specifics of these rights vary from state to state, they generally include the following:

• Ownership: As mentioned above, stock ownership is equivalent to corporate ownership. The portion of a company owned by a given shareholder is expressed as a percentage equivalent to the number of shares owned, divided by the number of a company’s outstanding shares. A majority shareholder, or shareholder who owns more than 50% of a company’s available stock, is said to have a controlling interest in said company. In other words, such a shareholder owns a large enough portion of the company that they are able to leverage their voting power to make unilateral decisions about its direction.
  
• Voting rights: The ability to vote on issues related to a company’s business decisions is arguably the most important action shareholders are granted by law. Shareholders can vote on matters such as the election of the company’s board of directors, mergers and acquisitions, and changes to a company’s charter. Through these decisions, shareholders have agency over the direction of a company and can express their satisfaction or dissatisfaction with its leadership. In most cases, a shareholder gets a number of votes equivalent to the number of shares they own, so a larger investment translates to more voting power. This is how majority shareholders are able to exercise their control interests. Legally, shareholders are entitled to vote by proxy if they prefer to cast their votes remotely or are unable to do so in person.
  
• Right to transfer ownership: Shareholders have the right to sell their stock when they see fit, and the company has no ability to prevent or interfere with this action.
  
• Dividends: When a company’s value grows, it has three options for what to do with its newly acquired profits: reinvest into the company, pay profits out to shareholders as dividends, or a combination of the two. As such, dividends represent a way for companies to build trust and morale with shareholders, which is why some choose to pay out dividends even when they haven’t recently made a profit. As a shareholder, dividend payments can be a way to receive additional financial benefit from your investment beyond a potential increase in stock value.
  
• Right to inspect corporate documents: Shareholders fall into a special space between the company’s management and the general public when it comes to the ability to review a company’s documents, as the right to inspect the minutes of board meetings, the company charter, and other basic records are protected by law. However, shareholders are not privy to all of a company’s documents. For example, shareholders can’t freely inspect a company’s books; their only legally enshrined window into a company’s financial specifics comes in the form of quarterly financial disclosure reports. Corporate documents can help you ascertain important indicators of a company’s performance, such as stockholders’ equity.
  
• Right to sue for wrongful acts: Shareholders retain the right to sue a company in which they have invested for a number of reasons. In general, shareholders may be motivated to sue when they perceive that a company or its management has deceived or misled them, mismanaged the company’s finances, or denied them one or more of the other rights discussed on this list. For example, if a company refuses to allow a shareholder to inspect its corporate charter, the shareholder has the right to sue to gain access.
  
• Right to attend and participate in shareholder meetings: By law, both public and private companies must hold special meetings for shareholders on an annual basis, as well as in the event of certain major junctures that affect the company’s trajectory, such as mergers, acquisitions, or bankruptcy. Shareholders benefit from a number of rules that govern the way these meetings are communicated about and conducted, such as the amount of notice companies must give shareholders that a meeting is taking place and the way meetings are documented for future inspection.
  
• The right to claim assets after a liquidation: When a company is unable to pay its debts by normal means, often at a time of bankruptcy or closure, it may need to sell off its assets to do so. Since shareholders are effectively a company’s co-owners, they are entitled to claim any assets left over after the company’s debts are paid. It’s worth noting that preferred shareholders are entitled to such claims before common stockholders.

Pros and cons of being a shareholder

There are many possible reasons to begin investing in stocks, from building wealth over the long term to earning passive income through the purchase of dividend-paying stocks. But before you decide to purchase your first stocks, make sure you understand the risks involved in stock ownership. Here are a few key pros and cons to consider as you learn how to become a shareholder.

Pros of being a shareholer:

• Potential for capital gains: As a shareholder, you investment could accrue capital gains, which, in the case of owning stocks, refers to the appreciation of value above the purchase price. Note, however, that such gains may be subject to tax upon the sale of the stock in question.
  
• Dividend income: As an investor, you may be eligible to receive dividends, or corporate earnings which get distributed amongst qualified shareholders, as determined by the company’s board of directors. Dividend income is typically issued in the form of cash or additional stock and paid on a quarterly basis. As mentioned above, dividend payouts are just one option a company has for how to allocate its profits, so remember that not all companies issue dividends. On the other hand, some companies choose to issue dividends to shareholders regardless of profitability as a gesture of goodwill and confidence.
  
• Ownership in the company: Company ownership through the purchase of stock is a tool that allows you as an investor to have a say in its operations. This means that you can take action, by voting, to influence the decisions a company makes that affect your potential capital gains and dividend payouts.
  
• Diversification: As the saying goes, “don’t put all your eggs in one basket.” That’s the idea behind diversification: owning multiple types of investments may help to insulate your overall portfolio from the negative impact of a single investment’s decline in value. So if you already own securities like bonds or mutual funds,  becoming a shareholder offers you the ability to further diversify, or spread your investments to another asset class.
  
• Liquidity: One of the benefits of becoming a shareholder is the liquidity of stocks as an investment relative to some other asset classes. An investment’s liquidity is the ease with which an investor can sell it for cash. Compared to assets like bonds or real estate, stocks are highly liquid, as they can generally be sold quickly. As with all assets, liquidity is variable from stock to stock. The more liquid a stock is, the easier it will be to convert your shares to cash. 

Cons of being a shareholer:

• Risk of loss: While investing in stocks has the potential to help you grow your wealth, it’s also possible that you’ll see a decrease in the value of your investment from the time of purchase. If you choose to sell these depreciated shares, you won’t receive as much in return as you initially invested, resulting in a loss. Additionally, because stocks are not FDIC insured, you may lose your investment entirely if a company in which you have invested goes bankrupt.
  
• Limited control: Despite the partial ownership that shareholders enjoy, the actual control you have over a company in which you’ve invested is limited. Unless you own a majority of a company’s shares, decisions concerning its management, strategy, and stock price are largely out of your hands. If a company makes decisions you don’t agree with, selling your shares is often your only recourse. Note that control is even more limited for preferred shareholders, who don’t enjoy the voting rights of their common shareholder counterparts.
  
• Volatility: As a shareholder, it is important to understand the relative volatility of the assets and markets in which you’re investing. Market or asset volatility is essentially a measurement of the relative risk of investing. More specifically, the more volatile a stock is, the more quickly and dramatically its price may fluctuate over time. This may result in a riskier investment.
  
• Fees and taxes: When you experience growth in your investment, you may be tempted to sell off shares and convert them to cash. But keep in mind that stock sales are often subject to brokerage fees, capital gains taxes, and other additional costs that cut into your ultimate returns. Make sure you understand these consequences and consider the right time to sell as it relates to your overall financial picture.

How to become a shareholder

To become a shareholder, start by setting up a brokerage account to facilitate your investment activities. A brokerage can provide guidance on suitable stocks based on your investment approach and financial goals. Whether you prefer traditional in-person brokers or robo-advisers to generate recommendations algorithmically, your brokerage will do the actual purchasing of shares for you. Once you make your first stock purchase, you become a shareholder of the company.

The ins and outs of stock ownership

Shareholders occupy an important role in the stock market. Investors influence the value of stocks through their trading decisions, help companies raise capital to achieve their goals, and contribute to major corporate decisions, all while working toward building wealth for themselves. Now that you understand some of the basics of what a shareholder is and how to become a shareholder, Stash is ready to help you get started investing your way.

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The post What Does It Mean To Be a Shareholder? appeared first on Stash Learn.

In this article, we’ll cover:

• What bonds are
• What stocks are
• How stocks and bonds differ
• Their place in your portfolio

What is a bond?

Corporations and governments issue bonds to raise money. By buying a bond, you’re essentially loaning the issuer the sum of money you’re investing, and they’re agreeing to pay you interest periodically, as well as the face value of your loan when the bond reaches maturity. The maturity date, or length of time the issuer holds your principal, varies widely among different types of bonds; some even mature in less than a year, making them appealing to people looking for short-term investments.  

Investors can purchase bonds through a brokerage, investment bank, or, in the case of government bonds, directly from the U.S. government. They can be an attractive investment because of their relatively low risk and because they provide a predictable income stream. 

Types of Bonds

Different types of bonds come with varying levels of risk, expected returns, maturity, and tax considerations. Broadly, there are three types of bonds to consider: U.S. government, corporate, and municipal bonds. 

• U.S. government bonds: A government bond is issued by the federal government and is usually considered a low-risk investment because it is government backed. While these are generally the lowest-risk bond investments, they tend to offer lower rates of return, and the fixed interest rates may risk falling behind rising inflation. They are considered at low risk of default and are usually tax advantageous because they are typically exempt from state and local tax. The ten-year Treasury bond is one of the most common examples of this type of bond. 
• Municipal bonds: A state or other municipality issues a municipal bond. These are seen as having somewhat higher risk compared to government bonds but are considered safer than corporate bonds. While yields are often lower than corporate bonds, interest from these bonds is often free from federal income tax, as well as from state tax in the state where they’re issued 
• Corporate bonds: A corporate bond is issued by a corporation. These bonds typically offer higher yields, but the interest you earn is subject to taxes, and they are at higher risk of default than government bonds, as a company could declare bankruptcy. If the company defaults on the bond, you could lose both interest and your principal investment.

Pros and cons of investing in bonds

Bonds can be one element of a diversified investment portfolio, and like all investments, they come with distinct advantages and disadvantages. 

Pros:

• Fixed returns: Before investing, you can know exactly what your return will be based on the bond’s fixed interest rate. You’ll generally receive interest rates periodically, and your full principal is returned when the bond matures.
• Lower risk: The return you receive on your investment is in the form of interest, not directly tied to a company’s share price, so bonds are less subject to the risks of market volatility. In the event a company has to liquidate, bondholders are paid before shareholders. Of the three types of bonds, government-issued bonds are considered the lowest risk for default. 
• Less volatile: Bonds with a longer maturity are sensitive to changes in interest rates and inflation because they affect the real rate of return, or how much the face value and interest are actually worth. Despite this impact, bond values are still generally more stable than stock values.

Cons:

• Lower returns: Historically, bonds have seen lower returns than stocks. While investors see fixed returns, making earnings more predictable, the growth potential is usually more limited than investments in stocks. 
• Limited liquidity: Liquidity refers to how quickly you can get your hands on your cash. Some bonds are more liquid than others, but, unlike most stock investments, your investment can get locked in for a number of years without easy access to that money.
• Interest rate risk: Bonds are more directly impacted by changes in interest rates, which means their value and price can fluctuate as interest rates rise and fall. Interest rates and bonds generally have an inverse relationship, referred to as interest rate risk. When rates go up, bond prices go down, and when rates decline, bond prices typically rise. 

What is a stock?

A stock is an equity representing ownership, or shares, of a company, making the investor a shareholder and entitling them to a portion of that company’s profits. Public companies sell their stock through a stock market exchange to raise money for their business. Investors buy those stocks through a brokerage. They can make money when the stock price increases and they sell at a profit, or through dividends if a stock pays dividends. While stocks are considered riskier than bonds, they have a higher earning potential.

Types of stocks

Stocks are categorized in several ways. This includes the stock type, the company’s size, and specific stock characteristics. While these categories help group stocks by common characteristics, stocks in the same category don’t necessarily share any other significant characteristics, risks, or performance expectations.

• Common stock: Most stocks are common stocks. These represent partial ownership of a company and may or may not offer dividends. If a company fails without having assets left over, investors lose their investment.
• Preferred stock: Preferred stocks give shareholders a preference over investors who own common stock. While they don’t have voting rights in a company, these investors receive dividend payments before common shareholders do and get back a certain amount of money if the company dissolves. Not all companies offer preferred stocks. 
• Large-cap stock: These companies have a market capitalization value of more than $10 billion. Large-cap stocks are a significant portion of the U.S. equity market and are often core portfolio holdings. These tend to be more stable investments than mid-and small-cap companies but do not always offer the same growth opportunities.
• Mid-cap stock: Mid-cap stocks have a market capitalization value between $2 billion and $10 billion. These companies offer growth potential and are considered less risky than small-cap stocks. 
• Small-cap stock: A small-cap stock’s market capitalization value is generally between $250 million and $2 billion. These companies are usually growing fast but are seen as more volatile and risky than the more stable mid- and-large cap stocks.
• Growth stock: A growth stock is a share in a company that is expected to grow at a rate significantly above the market’s average growth. Because these companies are reinvesting in their growth, they generally do not pay dividends. Growth stocks are also considered more prone to volatility in share price.
• Value stock: An inverse of a growth stock, a value stock has the potential of selling at a higher price but is currently trading at a lower price than its actual worth based on its earnings, dividends, or sales. Value stocks are typically less volatile and more stable than growth stocks, making them relatively less risky.

Pros and cons of investing in stocks

Those investing in stocks are investing in a company’s potential, which comes with varying degrees of risk and possible returns. Whereas a bond generally has fixed returns, the stock market can be much harder to predict.

Pros:

• Potential for higher returns: Investors have the potential to get a much higher return with stocks than bonds in the form of both dividends and increases in stock values. 
• Liquidity: Investors can sell their stock anytime, meaning it’s easy to take money back out of the market if you need it. Note that if the timing isn’t ideal, you risk taking the money out of the market at a loss. 
• Staying ahead of inflation: Money held in the S&P 500 has had an annualized stock market return of around 10% over the long haul, which is historically a higher rate than inflation.

Cons:

• Time: Investing can be time-consuming, as it requires research, monitoring the market, and time-in-market to see returns. Compounding returns may take years or decades to see. Unlike bonds, you can’t predict at the outset when you will see a return on your investment.
• Risk: Returns are not guaranteed. It is always possible that a company does poorly and stock prices drop significantly. And there’s no guarantee stocks that drop in price will recover their value, so you may wind up selling them at a loss. stocks, you’ll experience a loss. If you can’t afford to lose your initial investment, purchasing bonds gives you a higher likelihood of hanging on to your principal compared to stocks. 
• Volatility: Stock prices can rise and fall dramatically. This volatility means that the value of your stocks could drop, sometimes dramatically and unexpectedly. Volatility can also be hard for investors who feel stressed when watching their investments rise and fall dramatically, and may cause them to make emotional selling decisions. 

Bonds vs. stocks

Stocks and bonds often form the building blocks of a diversified investment strategy. They perform differently under different market conditions, have distinct tax implications, and have different risks and returns. Where stocks can be riskier with higher returns, bonds are generally more stable with more predictable returns. 

Bonds and stocks in your investment portfolio

It doesn’t always come down to choosing between bonds vs. stocks in your portfolio. If you’re following a diversified investment strategy, you may wish to own both types of investments, in which case you’ll want to consider what percentage of bonds and stocks to hold. Owning both is considered part of a because it spreads the risk of poor performance across investments. 

Your age, time horizon, risk tolerance, investment objectives, and available money will impact how you diversify your portfolio. Often investors choose to invest in higher-risk investments with higher possible returns when they’re young, which could mean holding more stocks than bonds. On the other hand, many investors gradually reduce their risk as they approach retirement in order to focus on asset preservation more than growth, in which case having a more significant percentage of your portfolio dedicated to bonds may make sense. Your specific diversification strategy will depend on your unique situation and goals. 

Stocks vs. bonds in your investment strategy

Diversification is one of the pillars of the Stash Way, and both stocks and bonds are core components of this investment strategy. While it is not a guarantee of success, spreading your portfolio across diverse assets that behave differently in the market and have different volatility can reduce your vulnerability to the risks associated with any single asset. 

Stocks and bonds are core components of a diversified investment strategy that can help you achieve your long-term financial goals. Determining what percentage of that portfolio you want to invest in bonds vs. stocks is up to you. 

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Investing in stocks that pay dividends is one way that investors can see a predictable return on their investment.

In this article we’ll cover:

• The benefits of investing in dividend stocks
• Factors to consider when choosing stocks that pay dividends
• Examples of top stocks that pay dividends
• Risks and challenges of investing in stocks that pay dividends
• Strategies for investing stocks that pay dividends

Benefits of investing in dividend stocks

There are many reasons investors choose to invest in companies that pay dividends. Like all investments, dividend stocks have risks. However, investing in dividend-paying stocks offers two potential sources of profit: through the stock prices rising and through dividend distributions made by the company. While a stock’s value can rise and fall with the market, dividends are generally paid out consistently either quarterly or yearly, depending on the company.  

Additionally, stocks that pay dividends are often more likely to be in less volatile sectors, which can help reduce risk compared to investing in stocks in growth stocks. Many investors choose to invest in dividend-paying stock for consistency, compounding through reinvestment, and stability. 

Key benefits of investing in dividend stocks include: 

• Predictable income stream and cash flow for investors
• Potential for long-term growth and capital appreciation
• Potentially lower risk compared to growth stocks
• Hedge against inflation
• Offers some stability during market downturns
• Potential tax advantages with qualified dividends

What to consider when choosing stocks that pay dividends

Not all companies offer dividends, and not all dividend stocks offer the same stability and results. You’ll need to consider the company’s dividend yield, dividend payout ratio, dividend growth, financial performance, and larger industry trends before investing in a dividend-paying stock. 

Dividend yield

The dividend yield is the percentage of a company’s share price that is paid out in dividends each year. Keep in mind that dividend yields are subject to change as the market fluctuates. 

Dividend yield = Annual dividends per share / Price per share

For example, a $20 stock that pays an annual dividend of $1 has a 5% dividend yield. Generally, 4% is considered a favorable dividend yield.

Dividend payout ratio

The dividend payout ratio shows how much of a company’s after-tax earnings are paid out to shareholders. Companies that don’t pay dividends have a 0% ratio,  and companies that pay their entire net income in dividends have a 100% ratio. Experts say that a payout ratio under 60% is a sign of stability in a stock that pays dividends. 

Dividend payout ratio = Dividends paid / Net income

For example, a business that makes $10 million and pays out $5 million in dividends has a 50% payout ratio. 

Company financials and stability

Since dividends are paid from a company’s cash flow, it’s important to understand its ability to generate profit over time. Some indicators you may want to look for in a company are healthy cash flow, consistent growth, and a low debt-to-equity ratio. You might also consider how consistent a company’s performance has been, as fast or unstable growth can be seen as a marker of potential risk.

Dividend growth history and share price performance

Stocks that pay dividends often increase their dividend payouts over a number of years; understanding a company’s dividend growth history can help you assess its stability. It is recommended to look for a minimum five-year track record of strong dividend payout signals and limited stock price volatility. For consistent annual dividend increases, consider companies that have increased their dividend in at least eight out of the 10 prior years. 

Industry trends and outlook

A company’s performance can be heavily impacted by its industry. In addition to the industry’s historical performance, consider current trends and the outlook for the future. Are consumers shifting towards or away from an industry? Is the industry being affected by changes in technology or government regulations? Tracking trends may help you identify potential risks in the sector overall. 

Using dividend-focused stock screeners

A stock screener is used by investors to choose stocks based on their specific criteria. A dividend-focused stock screener helps you identify stocks with dividends based on price, dividend ratio, debt-to-equity ratios, sector, and more. 

There are numerous free and paid stock screener options that will provide you with a list of suggested stocks, which can be faster and easier than exploring each stock one at a time.

Examples of top stocks that pay dividends

There are several categories of dividend stocks that are more likely to provide stable income and potential capital appreciation. Tracking the performance of blue chip stocks, high-yield dividend stocks, and dividend aristocrats can help you form your dividend investment strategy.

Blue chip stocks

A blue chip stock is a well-established, financially sound company with a generally long history of dependable earnings. These companies are often stable market leaders who are solidly profitable, but they are not expected to grow  as fast as newer “growth” stocks. . While not all blue chip stocks pay dividends, those that do are often appealing options for investors who prioritize stability and consistency. 

Here are a few examples:

High-yield dividend stocks

High dividend yields can be seen as either a sign of a strong opportunity or a warning. The higher the dividend yield, the more money you’ll receive for each share you own. But that doesn’t necessarily ensure a strong investment: dividend yields tend to go up when stock prices plunge, making an opportunity seem strong when it might actually be a red flag. Companies that offer a high dividend yield are also returning a significant percentage of profits to investors, instead of growing the company, which can have a long-term impact on stock performance.

When considering high-yield dividend stocks, investors also look at the company’s stock price trends, dividend payout ratio, and dividend yield to get a more complete picture. 

Here are a few examples:

Dividend aristocrats

A dividend aristocrat is a company in the S&P 500 that annually increases the size of its dividend payout. These companies are often considered nearly recession-proof and enjoy steady profits and growing dividends. They have raised their dividends consistently for at least 25 years, providing a stable income for shareholders, but potentially at the expense of their own growth opportunities.

There are usually fewer than 100 dividend aristocrats at any given time, so your dividend aristocrat options are limited. 

Here are a few examples:

Risks and challenges of investing in stocks that pay dividends

Like all investments, stocks that pay dividends come with their own set of risks. Dividend-paying stocks are subject to economic downturns, market corrections, and volatility. While many companies with dividend-paying stocks are more stable than the rest of the market, that doesn’t mean that they will stay that way forever or that broad trends, fluctuations, or changing marketing won’t impact your investment. 

Risks you may wish to consider include:

• Dividend cuts or suspensions: A company may choose to reduce dividend payments or even suspend them altogether. Generally, a dividend cut is considered a sign that a company is experiencing cash-flow issues or other performance problems. When dividends are cut, stock prices are more likely to fall, which can result in significant losses for investors. 
• Interest rate risk: Rising rates can result in higher volatility for stocks and lower values, and can heavily impact debt-heavy, interest-rate-sensitive industries. When interest rates rise, corporate profitability and stock prices can be negatively impacted.
• Market volatility: Market volatility tends to impact the more stable dividend-paying stocks less than non-dividend-paying stocks. That said, market volatility can still affect a company’s stock prices, as well as its profits. Even if you’re receiving income from dividends, the value of your shares can drop.
• Tax implications for dividend income: Dividends are classified as either qualified or regular dividends, and the latter is taxed at your ordinary income tax rate. That rate is often higher than the capital gains rate that’s assessed on most other investment earnings.  

How to invest in dividend stocks and funds

Okay, now that you know what a stock that pays dividends is, it’s time to figure out how to do the actual investing. 

1. Educate yourself: Before you start selecting specific investments, you’ll want to understand the nuances of how dividends work and how often dividends are paid. You should also stay up to date on broader market and investment news and start tracking the performance of companies you’re interested in.
2. Open a brokerage account: A brokerage account is a taxable investment account you use to buy and sell securities. This is where you can deposit money and buy, sell, and store your securities. You’ll need a brokerage account in order to purchase investments, including stocks that pay dividends.
3. Choose your dividend-paying stocks:: Your next step is to research specific stocks. Consider starting small, with a couple of investments, and research their financials, markets, and dividend yield. Take a look at their performance over the past few years and the outlook in their sector.
4. Consider investing in dividend ETFs:  In addition to investing in individual stocks, consider investing in exchange-traded funds (ETF) that contain dividend-paying stocks. Dividend ETFs offer investors a way to diversify their portfolio across different sectors, industries, and geographic regions. This can help to reduce your exposure to any one company or sector and potentially lessen your overall risk.
5. Diversify: Diversifying your investments helps you avoid putting all your eggs in one basket. You may wish to purchase multiple stocks in different sectors. As you start purchasing stocks, keep an eye on your asset allocation, industry diversity, and even the geographic location of your investments. You may also want to diversify the types of securities you own by purchasing bonds and funds in addition to dividend-paying stocks.  
6. Decide how much to invest: How much you choose to invest is a personal decision that can be driven by many factors, including your income, age, risk tolerance, growth goals, and comfort. It may be valuable to start small and build up your portfolio over time, as you become more familiar and comfortable with your investment strategy.
7. Invest in your dividend stock or fund: Now it’s time to place your order. Select your stocks with dividends from within your brokerage account and make your order. If you use an online brokerage or investment app, you can buy your stocks right from your phone.
8. Monitor your investments: You’re not done once you’ve made your first purchase. You’ll want to check in on your stock investments over time to track your portfolio’s growth. You might also consider what you want to do with your dividend income when you receive it, such as using a dividend reinvestment program (DRIP) to buy additional shares with your dividend earnings.

Ready to start investing in stocks that pay dividends?

Many investors are drawn to dividend-paying stocks because they can earn income from both dividends and potential returns when the share price increases. And reinvesting earnings with a DRIP can help them increase the power of compounding. If you’re ready to invest in stocks that pay dividends, Stash makes it easy with fractional shares and an ETF dedicated to dividend-paying stocks. And you can get started with any amount. 

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The post Stocks That Pay Dividends: A Guide to Investing in Dividend Stocks appeared first on Stash Learn.

Table of Contents

• What is cryptocurrency?
• What are stocks?
• Major differences between stocks vs. crypto
• Cryptocurrency vs. stocks FAQs

Debating whether to invest in cryptocurrency vs. stocks? Both stocks and crypto have a lot to offer beginner investors eager to diversify their portfolios. 

While cryptocurrency offers new investors a dynamic trading experience, stocks boast decades of market exposure and are protected by government regulations. 

While both assets differ in terms of long-term value, trading techniques, and diversification options, don’t be surprised if both find their way into your investment portfolio down the line.

What is cryptocurrency?

Cryptocurrency is a digital asset used as an alternate form of payment. Unlike physical currency, or fiat, cryptocurrency remains largely unregulated and has become a key player in the decentralized finance (DeFi) movement.

Every crypto transaction is publicly recorded on a digital ledger system known as blockchain technology. Nodes of data, called smart contracts, are linked together to form transaction blocks that are verified by anonymous computer networks.

Although Bitcoin is the most popular cryptocurrency, there are over 26,000 crypto tokens and coins to choose from. Investors can buy, sell, and trade cryptocurrencies on digital exchanges 24/7. 

Investors hold cryptocurrencies as they appreciate in value, then sell them for a profit. The price of crypto can range from less than a cent to thousands of dollars. Don’t let the price of a single coin scare you—it is possible to purchase a fraction of any cryptocurrency.

Emerging asset classes like cryptocurrency are quickly finding themselves on the radar of experienced and beginner investors alike. Like any investment, cryptocurrency comes with pros and cons that investors should carefully consider.

Pros and cons of cryptocurrency

Cryptocurrency has taken the world by storm due to its accessibility and high ROI potential. Here’s what crypto investors like about this digital asset:

• Crypto has a low barrier to entry: anyone with internet access can buy, sell, and trade cryptocurrency. There are no income requirements or legal barriers to entry like citizenship requirements or age limits.
  
• Cryptocurrency is a highly liquid asset: cryptocurrency can be exchanged for fiat 24/7. There is no limit to the number of times a coin or token can be swapped, and crypto can be traded into multiple types of fiat currencies.

• Crypto operates independently from centralized banks: investors do not have to wait for financial institutions to verify their transactions. Investors are solely responsible for their digital assets and are free to store their crypto online or offline.

Long-term investors who hold their digital assets with “diamond hands” can potentially be rewarded with unparalleled returns. However, crypto also has risks to remain aware of:

• Crypto lacks thorough regulation: since cryptocurrency is a decentralized asset, the Securities and Exchange Commission (SEC) is not able to thoroughly regulate the crypto market. This has led to multiple cases of fraud and misleading crypto offerings.
  
• Cryptocurrency has a history of volatility: the crypto market is far from stable and is still too young an asset class to warrant methodical investment strategies backed by decades of market research.
  
• Crypto isn’t widely accepted as payment: few countries around the world have begun to accept Bitcoin as payment, so altcoins have a long way to go before being accepted as a mainstream currency.

If an unregulated market bursting with potential and price volatility resonates with your investment goals, then cryptocurrency could be your next portfolio add. 

If not, let’s see what stocks have to offer beginner investors seeking a strategy backed by over a century of market exposure.

What are stocks?

Stocks represent shares of a tangible company. Shares equate to fractional ownership of a business and entitle shareholders to a proportionate slice of revenue. For example, the S&P 500 is a collection of 500 stocks across nearly a dozen economic sectors and is a respected stock index, or list of potential securities to invest in.

Investors can buy, sell, and trade stocks in the stock market. The stock market can be accessed online, however, it’s usually open during regular business hours on weekdays. Stock exchanges operate on a global scale and have been operating in the U.S. since 1792, boasting centuries of market exposure and investor research.

Similar to cryptocurrencies, an investor can buy and hold stock while it appreciates in value, then sell it for a profit. Depending on the company, investors can also earn a profit from their stock via regular dividend payouts.

An entity might sell stock to raise capital for business expansion or upcoming projects. In turn, stock shareholders may be able to vote at board member elections and make decisions about the company.

Pros and cons of stocks

Stocks have a long and respected global history. Here are the top reasons why stocks continue to be a go-to asset class for all levels of investors:

• The stock market leverages economic growth: since the stock market is tied to mainstream economic functions, stakeholders can potentially profit from economic growth. Shareholders who invest in a business before it peaks can benefit from capital appreciation.
  
• Stocks potentially pay dividends: some shareholders will have the option of receiving dividend payouts, or regular payments, from companies. This can result in more consistent profits as opposed to capital appreciation.
  
• Stocks are backed by centuries of history: the global stock exchange is the inspiration behind many research institutions, investing schools, and stock investing businesses due to its centuries of history and effect on the global economy. Thanks to these institutions, beginner investors have a plethora of stock market investing resources at their disposal.

Since the stock market has been around for so long, it has seen its share of crashes. Here are some cons associated with the stock market:

• Stock values are dependent on an emotional market: since the stock market is ruled by centralized institutions like the government, the value of stocks can be heavily influenced by current affairs and the collective outlook of the economy.
  
• Profits are subject to high taxation and regulation: high-paying dividend stocks may seem like a wholly beneficial element of stock investing, but dividend payouts and capital gains are subject to high taxation and strict government regulation.
  
• Stock investing requires specialized knowledge: the average beginner investor may have a more difficult time investing in the stock market vs. cryptocurrency. Since the stock market is older than digital assets, it has become a more complex and bureaucratic process.

Now that you know the basics of both assets, it’s time to learn about the major differences between stocks vs. crypto.

The major differences between stocks vs. cryptocurrency

The main difference between crypto vs. stocks is the years of experience between the two investment asset classes. The stock market has been shaped by increasing regulations and a close tie to everyday economic factors. The crypto market, on the other hand, is as innovative as it is unpredictable. 

The long-term value of crypto has yet to be seen, and crypto critics claim it needs more rules for investors to trade comfortably. Here are the major differences to note before you invest in crypto or stocks.

Long-term value

Since the crypto market has only been around since 2009, it’s difficult to say whether the asset possesses any real long-term value. However, Bitcoin has gone from being worth $5 to $39,000 in roughly a decade.

The stock market, on the other hand, enjoys an annual ROI of about 10%. Despite market dips, historical data shows why stocks are a preferred long-term investment. Both asset classes offer access to innovative Web3 entities, although cryptocurrency has closer ties due to its shared value of decentralization.

Diversification

Both stocks and cryptocurrencies offer assets across various economic sectors. The most visible difference between diversification opportunities is that crypto assets typically relate to digital assets and entities, while stock shares generally relate to brick-and-mortar businesses.

If you’re hoping to expand your investment portfolio into a variety of economic sectors like industrial, real estate, and retail, then stocks are a great idea. 

If you want to potentially capitalize on digital economic sectors like video gaming, decentralized finance, and Web3 entities, then cryptocurrency might be a better match. 

Trading

If you want to have the ability to liquify your investment at any time, crypto is a worthy asset class to consider. There are dozens of crypto exchanges, and all are available to anyone with internet access. 

Both cryptocurrency and stocks can also possess value past the amount of fiat it’s worth. Blockchain projects are often ruled by Decentralized Autonomous Organizations (DAOs) which are similar to shareholder groups within the stock market. 

Although the stock market is limited to regular business hours as trading times, this restriction adds a competitive edge for stock investors interested in trading regularly. 

Regulation

The SEC’s stock market regulations were created to protect individual investors from scams and keep them from investing in assets they could not afford to maintain. This strict regulation has increased the taxation on capital gains.

Cryptocurrency, however, is largely unregulated, so investors are prone to scams since almost anyone can create and sell crypto. The freedom of decentralized finance also comes with an added layer of due diligence for potential investors.

Now that you’re aware of the main differences between the crypto market vs. stock market, consider browsing through our other investment options to learn about potential portfolio opportunities. 

Cryptocurrency vs. stocks FAQs

Still have questions about crypto vs. stocks? Find the answers below. 

Is it better to invest in crypto or stocks? 

It depends on your investment goals. Cryptocurrency could be a good investment for investors looking for low barriers to entry and autonomy over their digital assets. Since stocks are backed by centuries of market exposure and research, beginner investors may feel more confident investing in them. 

Which is safer, stocks or crypto? 

Stocks are generally considered to be a safer investment due to SEC regulations and years of market research. However, this does not make investors less prone to stock market crashes or invalid shares.

Is cryptocurrency a stock?

No, cryptocurrency is a digital asset that operates outside of centralized financial institutions. Stocks are a regulated asset class that offers shares in legally recognized companies. However, both crypto and stocks are categorized as investment asset classes.

Should I invest in crypto?

It depends on which cryptocurrency you want to invest in and why. A good rule of thumb is to never invest more than you are willing to lose. Consider your financial goals, time horizon, and risk tolerance before investing in any asset.

If you still want to invest in cryptocurrency, heavily research a coin or token before investing, and consider taking a long-term investment approach.

How does cryptocurrency impact the stock market?

Cryptocurrency, stocks, and real estate all affect each other since each asset class is reliant on the same economic flow of investment capital. Cryptocurrency can impact the stock market by attracting investment capital that would otherwise be pooled into the stock market. 

The post Cryptocurrency vs. Stocks: Which Investment Is Best for You? appeared first on Stash Learn.

In this article, we’ll cover:

• Fractional shares vs. whole shares
• How fractional shares work
• The benefits of fractional share investing
• The disadvantages of fractional shares
• Things to know about fractional share investing

The difference between fractional shares and whole shares

A whole share is a single share of a company’s stock, an ETF, or some other investment. Shareholders might sell for a profit, receive dividends, and vote on important company issues. But whole shares can cost hundreds or even thousands of dollars, putting them far out of reach for many investors.

If you imagine a whole share is a pie, fractional shares are slices of that pie. The pie can be divided into a few slices or a great many. Fractional shares offer many of the benefits of whole shares at a lower purchase price. 

Here’s an example: 

• Alex wants to invest $100 in Company B, but a single share costs $1,000. 
• Alex’s brokerage offers fractional shares of Company B’s stock. 
• Alex invests $100 and receives a 0.1 share of Company B. ($100 / $1,000 = 0.1)
• When Company B’s stock price rises or falls, the value of Alex’s investment rises or falls proportionate to the fractional share. 

While fractional shares allow you to invest with less money compared to whole shares, they aren’t available at every brokerage, and they may come with certain fees and limitations.

How fractional shares work

If you invest with a brokerage firm that offers fractional shares, you can purchase them like you would any other investment, like whole shares of stocks, ETFs, or mutual funds.

Until 2019, it was virtually impossible to purchase fractional shares directly from a brokerage. Many retail investors, however, were priced out of higher-value securities in the stock market. So brokers created fractional shares of popular investments, some priced at only a few dollars, to woo younger, middle-income investors. Nowadays, many brokerage firms offer fractional shares of both stocks and funds. 

To create fractional shares, brokerages purchase full shares, slice them into fractions, and parcel out the slices to multiple investors. That’s why fractional shares typically can’t be transferred to a different broker if you switch investment firms; instead, your broker will usually buy back your fractional shares. In that case, you’ll owe taxes on any profit you make from selling your shares back to the broker. 

Fractional shares created through DRIPs, stock splits, and mergers

Fractional shares are sometimes created as a consequence of dividend reinvestment programs (DRIPs), stock splits, and mergers and acquisitions. In some cases, whole shares you own may become fractional shares.

DRIPs, which repurpose dividend payments to purchase additional shares of the same investment, result in fractional shares whenever share prices exceed dividend payments.

A type of stock split may also produce fractional shares. There are two types of stock splits: a forward stock split, in which more shares are created, and a reverse stock split, in which shares are consolidated to create fewer whole shares. The value of your overall investment doesn’t change; the only alteration is the number of shares you own. 

A reverse stock split might result in whole shares you own becoming fractional shares. Here’s a hypothetical example of it might work: 

• Imagine Jaylen owned two shares of stock in Company X, each worth $100. The total investment is worth $200. ($100 * 2 = $200) 
• Company X conducts a 1:4 reverse stock split. In a reverse split, shares are consolidated to create fewer overall shares. Thus, after a 1:4 reverse split, every $100 share is a 0.25 fractional share worth $100. A full share costs $400.
• The reverse split converts Jaylen’s two whole shares, worth $100 each, to two 0.25 fractional shares worth $100 each. 

When a company merges with another company or is acquired, fractional shares may also be created, depending on how the merger or acquisition is structured.

Benefits of buying fractional shares

The availability of fractional shares has opened new doors for many investors. It takes less money to invest in stocks, giving you access to a wider pool of investments, especially stocks with high share prices. As a result, you might be able to start investing sooner and find it simpler to diversify your portfolio. 

Key fractional share investing benefits include:

• Start investing with an amount that fits your budget
• Invest in stocks that match your interests and strategy
• Get access to investing in more expensive stocks
• Explore investments in more types of securities
• Find more options for portfolio diversification

Fractional shares allow you to start out small, but you can still potentially earn a return on your money. That’s especially true if you have a long time horizon for your investment. Even small beginnings can earn you money, and with the power of compounding, they can grow significantly given enough time.

Disadvantages of fractional shares

So what are the drawbacks of purchasing a fraction of a share? They vary significantly among brokerages; you may find differences in trading rules, costs, fees, and more. It’s always critical to do your research before investing, and fractional shares are no exception.

Potential disadvantages to consider include:

• Limits on when, how, and what you can sell
• Fees for trading fractional shares
• Lower dividend income and profits
• Lack of stock voting rights
• Risk of illiquid shares that are difficult to sell
• Tax consequences when changing brokerages

Fractions or full shares: multiple paths for your portfolio

Fractional shares may be worthy of careful consideration, especially for new investors. They can open opportunities to investing that align with your budget, allowing you to start investing and diversifying your portfolio more easily. At the same time, they can come with restrictions that could surprise an unwary investor. 

If you’re interested in fractional share investing, you’ll find options at many brokerages, like Stash. Take the time to do your research, and you may find yourself investing in the stock market with more confidence.

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Fractional shares FAQ

1. Do fractional shares add up to whole shares?

Yes, although not in your portfolio. The brokerage buys a full share, divides it into slices, and sells the slices to different investors. It is possible to buy enough fractional shares of one stock to equal a whole share. For example, if a stock was available to purchase as 0.25 fractional shares, buying four of those fractional shares would equal a whole share. (0.25 x 4 = 1)

2. Do fractional shares pay dividends?

If an investment pays dividends, fractional shareholders receive a proportional share. For example, if Stock D paid a dividend of $10 per share and you owned a 0.5 share, the dividend payment would be $5. ($10 * 0.5 = $5)

3. Is it better to buy fractional shares or whole stocks?

Ultimately, that’s a question every investor must answer for themselves. But fractional shares might be a good fit for your portfolio if you’re new to investing, or want more diversification in your portfolio without investing a lot more money. It’s also important to understand your brokerage’s rules and costs. In some cases, you might face limitations or fees that tip the scales away from fractional share investing.

4. Is it worth buying fractional shares?

The answer depends on your financial situation, your investment strategy, and the brokerage you’ve chosen. For example, you might discover fees that make fractional shares seem less worthwhile. Or you might want the freedom to transfer your portfolio; fractional shares are typically not transferable between brokerage firms, and liquidating them can have tax consequences.

That said, fractional shares offer a great deal of flexibility. To decide whether fractional shares are right for you, consider your long-term goals, brokerage fees and costs, and how closely its rules align with your financial strategy. And remember that all investments involve risk, including the risk that you could lose money.

5. Are ETFs available as fractional shares?

Sometimes. Each brokerage chooses the securities it will sell as fractional shares; some offer fractional shares in ETFs.

6. Can you sell fractional shares?

As a general rule, brokerages allow you to trade your fractional shares, although each has different rules and costs. But your brokerage may not guarantee liquidity. Liquidity measures how quickly and easily you can sell an investment without taking a loss. Lack of liquidity, or illiquid shares, can take longer to sell, and you might lose money. 

7. Are fractional shares included in DRIPs?

A DRIP uses dividends you earn to purchase more shares of the same security. DRIPs frequently result in fractional share ownership, because any given dividend payment might not be enough to buy a full share of stock.

How to invest in fractional shares with Stash

Learning how to invest in fractional shares can be simple with Stash. Just open an account, choose the investments that interest you, and Stash does the rest. Stash offers fractional shares of ETFs and single stocks, starting at any dollar amount. If you’re not sure where to start, you might try the Smart Portfolio, which creates a portfolio aligned with your risk profile. 

If you’ve ever wished you could get in on an exciting stock but found the share price too steep, you might want to consider fractional shares. Investing can be accessible when you take it one slice at a time.

The post What Are Fractional Shares? appeared first on Stash Learn.

For new investors, “P/E” might as well mean “physical education.”

Good news, though, as there’s nothing extracurricular about “P/E”—it’s one of the most widely used stock market terms and tools in the investment playbook.

A P/E ratio, also known as a price-to-earnings ratio, is the ratio between a company’s stock price and its earnings per share (EPS).

The P/E ratio helps you answer a simple, fundamental question when trying to decide if you should buy a stock: Are you paying too much?

So what is a good P/E ratio for stocks, and how can you calculate a P/E ratio yourself? Follow this beginner’s guide to learn more about P/E ratios, what they can tell you about a stock, and some of the ratio’s shortcomings.

How to tell if a P/E ratio is good or bad

The difference between a good and bad P/E ratio is not as cut and dry as it may seem. Generally speaking, investors prefer a lower P/E ratio, but to fully understand if a P/E ratio is good or bad, you’ll need to use it in a comparative sense.

Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio.

But it doesn’t stop there, as different industries can have different average P/E ratios. For example, a P/E ratio of 10 could be normal for the utilities sector, even though it may be extremely low for a company in the tech sector. Because of this, it’s important to always compare P/E ratios with other companies within the same industry.

So what is a good price-to-earnings ratio? To help you learn more about what makes a P/E ratio good or bad, we’ve broken down what a low and high price-to-earnings ratio generally means.

Generally, a low P/E ratio is good

When comparing a P/E ratio to the market average or competitors, a stock with a lower P/E is generally good. This is because you are spending less money for each dollar of a company’s earnings.

Generally, a high P/E is bad

On the other hand, a higher P/E ratio can be seen as a worse deal, as you are spending more money for each dollar of company earnings.

Now that you have a feel for what a low or high P/E ratio can mean, let’s find out how you can calculate the P/E ratio of a stock.

How to calculate P/E ratio using the P/E ratio formula

Ready to dive in and start calculating the P/E ratio of your favorite stocks? To calculate a stock’s P/E ratio, you’ll need to know the stock’s earnings per share (EPS) and its share price. To discover a stock’s EPS, you’ll divide the company’s net profits by its current share price.

Once you have those two numbers, you can input them into the P/E ratio formula.

How to calculate price-to-earnings ratio using the P/E ratio formula:

• P/E ratio = Share price ÷ earnings per share

For example, let’s say you wanted to calculate the P/E ratio for Apple (APPL). For the sake of this example, let’s pretend that the current stock price of APPL is $150.50, and its EPS is $6.10.

By plugging those numbers into the P/E ratio formula, you divide $150.50 by $6.10, which gives you a P/E ratio of 24.67, which is within the market average.

To take things a step further, let’s compare APPL to one of its competitors: Microsoft (MSFT). If MSFT has a current stock price of $255.75 and an EPS of $9.65, its P/E ratio is 26.50, which is higher than APPL.

Because of this, value investors would consider APPL to have a more ideal P/E ratio than MSFT.

Tips for using P/E ratio to analyze a stock

Now that you understand how to use the P/E ratio to value a stock, you might wonder what investors can expect when analyzing a P/E ratio. Follow these tips to help you understand what a high or low P/E ratio can tell you about a stock:

• If the P/E ratio is high: In some cases, a high P/E ratio can mean investors believe that the stock’s earnings will increase in the future. On the other hand, a high P/E ratio can indicate that a stock may be overvalued.
• If the P/E ratio is low: Alternatively, a low P/E ratio may indicate that a stock is undervalued. This can lead to investors seeing the low P/E ratio as an opportunity to buy the stock expecting the price to eventually rise to reflect the company’s increased earnings. Other times, a low price-to-earnings ratio can mean that investors believe that the company’s profits will decline in the near future.

With an understanding of what a P/E ratio can teach you about a stock, it’s important to also keep the ratio’s shortcomings in mind.

Recognizing shortcomings

As you can probably tell, a P/E ratio isn’t that useful on its own, and it shouldn’t be a standalone metric that informs your investment decisions. While it may seem like a simple calculation, it does have its shortcomings.

For example, determining a company’s earnings can sometimes be difficult. This is because accounting practices can differ from company to company, with some trying to hide costs to help inflate earnings.

Additionally, companies may have negative or no earnings, leaving you with either a “0” P/E ratio or a negative one, which is not useful for comparison purposes.

Another downside of P/E ratios is that you cannot use them to compare companies from different sectors. For example, you wouldn’t want to use a P/E ratio to compare Walmart (WMT) to Boeing (BA), whereas it may be helpful to compare Google (GOOG or GOOGL) to Yahoo (YHOO).

Lastly, even if a P/E ratio indicates that investors see a stock as a cheap buy compared to its earnings, it doesn’t mean that you should buy it. The price could be cheap for other reasons, such as a decline in customers.

Whether you’re brand new to investing or have been building your portfolio for years, knowing the answer to “What is a good P/E ratio?” is valuable information that can help bring added insight into a stock’s health.

But it’s crucial to remember that a P/E ratio is only one metric, and it shouldn’t inform your investing decisions by itself. Because of this, you should take the P/E ratio with a grain of salt and always do your research when short or long-term investing.

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FAQ about P/E ratios

If you still have more questions after learning the answer to “What is a good P/E ratio?” we’ve got you covered.

What is a normal P/E ratio?

A normal P/E ratio is close to the average P/E ratio range of its industry. For example, if an industry has a P/E ratio of 20 to 25, then a stock with a P/E ratio of 23 would be normal for that industry.

What is an industry P/E ratio?

An industry P/E ratio is the average P/E ratio of all companies in a specific industry. For example, the industry P/E ratio for the financial services sector would include the average P/E ratio of Wells Fargo, Bank of America, JPMorgan Chase, and other related stocks.

What is the difference between an absolute vs. relative P/E ratio?

The difference between an absolute and a relative P/E ratio is that a relative P/E ratio is the current P/E ratio compared to a benchmark of either the industry average or the historical P/E ratio of the individual stock.

For example, if the median P/E ratio of XYZ over the past ten years is 20 and its current P/E ratio is 15, then its relative P/E ratio is 75% or 15 divided by 20.

What is the difference between a trailing vs. forward P/E ratio?

The difference between a trailing P/E ratio and a forward P/E ratio is that a trailing P/E ratio uses the most recent earnings for the trailing twelve months, and the forward P/E ratio uses the future earnings expectations for the upcoming year.

What is the difference between a P/E ratio vs. earnings yield?

The difference between a P/E ratio and earnings yield is that earnings yield is the inverse version of the P/E ratio, calculated by dividing the stock’s EPS by its share price.

Unlike the P/E ratio, the earnings yield is expressed as a percentage and used to compare stocks to different assets such as fixed-income securities like bonds or Certificates of Deposits.

What is the difference between a P/E ratio vs. PEG ratio?

The difference between a P/E ratio and a PEG ratio is that the PEG ratio factors in expected growth. You can calculate the PEG ratio by taking the trailing P/E ratio and dividing it by the expected future growth rate.

For example, if the trailing P/E ratio of XYZ is 25 and its earnings growth rate for the next five years is 15%, then its PEG ratio is 1.67, or 25 divided by 15.

Generally speaking, experts consider a PEG ratio of one or less undervalued, as its price is low compared to its expected future growth.

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