Stock

Also called Share, Equity

A share of ownership in a company that can rise or fall in value and may pay part of the company’s profits as dividends.

What it means

Owning stock means owning a small slice of a business. Investors make money in two ways: the share price rises above what they paid, or the company pays dividends. They lose money when the price falls below their purchase price, and if a company fails, shareholders are paid last and can lose everything they invested.

Over long periods, a broad mix of U.S. stocks has historically grown faster than bonds or cash, but with much larger swings along the way, and past results do not guarantee future ones. Profits from selling shares held more than a year are generally taxed at long-term capital gains rates, shares held a year or less at ordinary income rates, and dividends are taxed in the year they are paid unless the stock sits in a tax-advantaged account.

Example

Suppose someone buys 100 shares at $50, for $5,000. If the price rises to $60, the shares are worth $6,000, a $1,000 gain of 20%. If the company also paid $1 per share in dividends, that adds $100 of income.

How it’s used

Building long-term growth in retirement and brokerage accounts
Owning shares of an employer through a stock purchase or equity plan
Holding many stocks at once through funds

Strengths and weaknesses

Strengths

Historically higher long-run growth than bonds or cash
Easy to buy and sell during market hours
Potential for dividend income as well as price growth

Weaknesses

Prices can drop sharply and stay down for years
A single company can fail, wiping out its shareholders
Gains are not guaranteed and are not protected by FDIC insurance

Good to know

Holding many companies, often through a fund, reduces the damage any single failure can do.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.