Buying a share of stock makes you a part owner of a company. You earn as its profits grow, through a rising share price and, at many companies, a cash dividend. You can’t lose more than you paid, but one company’s stock can still go to zero. Start with a fund that holds hundreds of companies.
Your shares come with a claim on the company’s profits and a vote, usually one per share, on matters like who sits on its board of directors, the group that oversees its managers. They give you no say in how the business is run day to day, and no promise of a dividend or a rising price.
A share’s price depends on what investors expect the company to earn in the years ahead, not on what it earned last year. That’s why a stock can fall while the business is doing fine. A company can beat analysts’ forecasts for the quarter and still see its shares drop if its outlook disappoints.
Shareholders are also paid last when a company goes bankrupt. Its lenders, suppliers, and employees are paid before you are, and the shares are usually left worthless. The debts it can’t pay never become yours, though, because a corporation is legally separate from its owners.
Put $1,000 into a single company’s stock and you can lose all of it, as shareholders in Lehman Brothers and Enron did when both went bankrupt and their stock was canceled. Put the same $1,000 into an S&P 500 index fund, which owns shares of about 500 large U.S. companies, and one bankruptcy costs you only a small part of it.
You don’t need to pick the next big winner to profit from stocks. The fund gives you a slice of hundreds of companies’ profits, and you can buy it through a brokerage account, the same kind of account you’d use for a single stock.
Make an S&P 500 index fund your first purchase, and buy individual stocks later only with money you could afford to lose.
To choose where to buy your first fund, compare the best online brokers.
Editorial & Advertiser Disclosure: The editorial content on this page is not provided, commissioned, reviewed, approved, or otherwise endorsed by any advertiser. Opinions expressed here are ours alone, not those of any advertiser. The offers that appear on this site are from companies that compensate us. That compensation may influence which products we cover and where and how they appear on a page – including the order in which they appear – but it does not influence our evaluations, ratings, or opinions. We do not include every company or offer available in the marketplace.
Related:
