What are stocks and its benefits and drawbacks?

Stocks grab a lot of headlines as they go up and down. Before you dive in, get comfortable with the risks and rewards. 

What are stocks?

A stock is often referred to as an ownership share. Some stocks pay quarterly or yearly dividends. A dividend is a portion of a company's earnings made to shareholders as a part of its profits.

Some stocks don’t pay dividends but offer the opportunity to profit by buying them at a low price and selling them at a higher price. 

There are two types of stocks: Common stock and Preferred stock. 

Common stocks sometimes receive dividends as part of the company’s earnings, and when a company performs poorly, common stockholders are last in line to receive payouts.

Common stocks also come with voting rights, with the opportunity to attend annual meetings, potentially influencing the company’s future direction.

In contrast, preferred stocks do not offer voting rights, but they’re entitled to dividends before common stockholders. Preferred stockholders will be paid first when the company’s profits are distributed.

The benefits of stocks

1. Stocks performed well over the long term

Many experts recommend holding stocks for the long term. Over a 20-year time period, the S&P 500 posted positive returns for investors. A selection of stocks in a balanced portfolio can typically grow faster and more reliably over the long term than less risky investments, like bonds and savings. 

2. Stocks are easy to purchase

Online brokerages, financial planners, and fintech services can help you buy stocks easily. However, it’s important to keep in mind that fees can vary widely and can be subject to change.

3. Easy access to your cash

You can access and sell stocks easily, providing quick access to the cash in your investment.

4. You don’t need to be rich

You don't need a large sum of money to buy and sell stocks. Many services require as little as $5 or $10 to start trading stocks.

5. Stay ahead of inflation

Despite the current uptick in inflation, stocks have performed well over the long term. They’re more likely to grow faster than typical inflation rates.

Drawbacks:

1. Exposure to high risk

When a company performs poorly, there’s a strong case that many investors will start selling their stocks, which can drastically reduce the value of a stock.

2. Stockholders are paid last

When a company goes bankrupt, other debts are often paid first, before stockholders. Common stocks are usually paid last.

3. Requires thorough study

Before buying stocks, it is important to thoroughly research a company to see if it can grow and provide a good return. It’s also important to keep track of the company’s growth potential to see how it can affect the stock price.

4. Can be highly volatile

With the uncertainty of the stock market, stock prices can go up and down in an unpredictable manner. 

How Bright can help 

Bright can build a financial plan that’s tailored to you, a clear step-by-step guide to your financial goals. It’s a good place to start before you start investing.

Powered by MoneyScience™, Bright studies your income and expenses and moves money when it makes sense for you, making smart payments on your credit cards and building your savings week by week. Bright even adjusts when your finances shift, getting you debt-free faster, so you have more to invest. 

If you don’t have it yet, download the Bright app from the App Store or Google Play. Connect your checking and your credit cards, set a few goals and let Bright get to work!

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