Of the most common forms of investments — stocks, bonds and mutual funds — stocks tend to fluctuate more than other investment vehicles but grow more over the long term. 

If you’re new to investing, here’s a few things you need to know about stocks and why they can be an important part of your portfolio.

What exactly is a stock?

Companies typically sell shares to gain money to grow the company. A stock represents your investment, your share, in that company. By purchasing stocks, you become part owner of the company, entitled to a portion of the company’s assets and earnings. How much of an owner you are depends on the number of shares you own compared to the number of outstanding shares for the company. 

For example, if a company has 1,000 shares of stock outstanding and you own 100 of those shares, then you are a 10% owner of the company. 

Stock prices rise or fall, usually driven by expectations of the company’s earnings or profits. It’s a really good idea to research a company and its stock’s performance before making a decision on purchasing stock.

Types of stock

Most companies issue two types of stock: common and preferred. Both can fluctuate in price and value. 

Common stock represents ownership in a company. Shareholders don’t have a say in the day-to-day operations of the company, but exercise some control by voting for the board of directors, voting to acquire other companies and weighing in on other important decisions. 

The company typically pays a dividend to shareholders. If the company doesn’t pay a dividend, any profits are reinvested in the business. Common stockholders are at the bottom of the priority list for ownership structure. This means you’re the last to receive any possible payout from the company in the event of bankruptcy — after creditors, bond holders and preferred stock owners. 

Preferred stock also represents ownership in a corporation. However, preferred stockholders normally don’t have the voting rights given to common stock owners. With preferred stock, you have a higher claim on the company’s assets and would get paid before any dividends are paid to people who hold common stock.

Should I invest in stocks?

Stocks can be an important part of any investment portfolio. As you build your portfolio, you’ll want to know what you’re investing for and how much risk you’re comfortable with, since stocks bear a greater risk than mutual funds or bonds. 

But with greater risk comes the potential for a greater reward, and over the long term, stocks tend to increase in value more than other types of investments. At the same time, they tend to be more volatile in the short term, making them a far better option for long-term investing. 

Civic Credit Union is here to help you learn more about how stocks may fit in with your investment goals.