No other investment available holds as much potential as
stocks over the long run. Not real estate. Not bonds. Not savings
accounts. Stocks aren’t the only things that belong in your investment portfolio, but they may be the most important, whether they’re purchased individually or through stock mutual funds. Since 1926, the stocks of large companies have produced an average annual return of
more than 10%. (Remember, that includes such lows as the Great Depression, Black
Monday in 1987 and the stock slide that followed September 11.)
You don’t have to beat the market to be successful over time. There is risk involved,
as there is in all investments, but the important thing is to balance the amount of
risk you’re willing to take with the return you’re aiming for.
Different Kinds of Stocks
First it’s important to understand what a stock is. When investors talk about stocks,
they usually mean common” stocks. A share of common stock represents a share of
ownership in the company that issues it. The price of the stock goes up and down,
depending on how the company performs and how investors think the company will
perform in the future. The stock may or may not pay dividends, which usually come
from profits. If profits fall, dividend payments may be cut or eliminated.
Many companies also issue “preferred” stock.
Like common stock, it is a share of ownership. The difference is preferred stockholders get first dibs on dividends in good times and on assets if the company goes broke and has to liquidate.
Theoretically, the price of preferred stock can rise or fall along with the common.
In reality it doesn’t move nearly as much because preferred investors are interested
mainly in the dividends, which are fixed when the stock is issued. For this reason,
preferred stock is more comparable to a bond than to a share of common stock.
It’s hard to think of a compelling reason to buy preferred stocks. They generally pay a slightly lower yield than the same company’s bonds and are no safer. Their potential equity kicker (the chance that the preferred will rise in price along with the common stock) has been largely illusory. Preferred stock is really better suited for corporate portfolios because a corporation doesn’t have to pay federal income tax on
most of the dividends it receives from another corporation.
Stocks are bought and sold on one or more of several “stock markets,” the best
known of which are the New York Stock Exchange (NYSE), the American Stock
Exchange (AMEX), and Nasdaq. There are also several regional exchanges, ranging
from Boston to Honolulu. Stocks sold on an exchange are said to be “listed” there;
stocks sold through Nasdaq may be called “over-the-counter” (OTC) stocks.
There are lots of reasons to own stocks and there are several different categories of
stocks to fit your goals.