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Basics of Stocks
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As a stockholder you are an owner of a company

Stock owners make most of their money from "capital appreciation", a fancy term for buy low and sell high.  Companies increase their stock values by growing earnings.  This is why it is earnings that drive stock prices over the long term.

Some companies share corporate profits with their share owners by paying dividends.

While people often view investing in the stocks as risky, risk depends on what you own

  • In the case of an individual stock, the risk is that the company goes out of business.  When a company has no current earnings and no prospect for earnings in the future, it is bankrupt and its stock value is zero. 
  • In the case of a mutual fund or index, risk means volatility or how much returns vary from year to year.  Some asset classes like U.S. small cap stocks and emerging market stocks are more turbulent than U.S. large cap stocks.      

 

<NEXT:  Understanding Volatily?>

 



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