You can gain ownership in a company by purchasing shares of its stock. Stocks are also referred to as equities. When you own the stock of more than one company, you have a portfolio of equity investments. Equities have numerous benefits, including liquidity, income from dividends and the potential for capital appreciation. Having a portfolio of equity investments also gives the advantage of diversification.
The potential for capital appreciation is one of the primary advantages of equity investments. If the company you invest in earns a profit, it might reinvest those profits back into the company to fuel additional growth through new product development, increased market share, new store openings or other growth strategies. As the value of the company grows, the market price of the company's stock typically increases. The stock of the average large American company has returned almost 10 percent a year since World War II, according to CNN Money, a rate that has outperformed bonds, real estate and the rate of inflation.
Older, more mature companies might have little to gain by continuing to grow. Instead of reinvesting all their profits back into the company, the board of directors might vote to pay a portion of those profits to shareholders in the form of a dividend. If you are looking for a steady stream of regular income, you might consider investing in the stocks of blue chip companies. Blue chip companies are companies that have a history of paying regular dividends in both good and bad economic times. Dividends are typically paid on a quarterly basis, so by having a portfolio of dividend paying stocks that all pay on different cycles, you can receive a dividend check every month.
Stocks are traded on major exchanges around the globe and around the clock, making them a liquid investment, which means you have a ready market to sell your stocks when you want. Stocks are not as liquid as money in your checking account, but are far more liquid than real estate. It will take a few days for settlement, but you can typically get money from your stock sale within a week.
A single stock is not the same as the stock market, or even a portfolio of stocks. A single stock might go up in a down market, or drop like a rock in a rising market. The Securities and Exchange Commission recommends adopting a strategy of equity portfolio diversification. Diversifying your equity investments means buying the stocks of different companies in different economic sectors at different times, in the hope that if one stock drops, another will rise to offset the loss. Most people don't have enough money, time or expertise to create a sufficiently diversified portfolio, but you can get both diversification of your investments and professional management by investing in a good quality stock mutual fund.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.