Investing in stocks

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Shares of common stock play a role in just about every investment portfolio. This article is for those who'd like to know more about where their savings might be invested. Here are the basics:
  • Stock (sometimes called equity) represents ownership of a company, divided among the company's shareholders
  • While any company can issue stock, only companies that meet legal requirements can issue shares for trading on U.S. stock exchanges where they can be bought and sold by any member of the public
  • The market value of publically traded stock can change at any time. When the value increases, the shareholder sees a capital gain, which can become part of the investor's return. When the value decreases, the shareholder sees a capital loss.
  • Public companies generally seek to earn a profit. Profit may be distributed to shareholders as a dividend, which can become another part of the shareholder's investment return. However, there may be times when the public company may not earn a profit.

Why stocks? A closer look at performance potential

Stocks carry higher investment risks than bonds or money market investments, but historically, they also have realized higher rates of return over longer holding periods (see chart). While past performance doesn't guarantee future results, the higher return potential of stocks can make them ideal investments for long-term investors seeking to build the value of their portfolios or to stay ahead of inflation. Both of these objectives are critical to investors with specific long-term goals in mind, such as saving for retirement.
Average rates of return for four types of stock compared with bonds and cash (1986-2015)1
Rates of return graph
1Stock values assume reinvestment of all distributions. Past performance does not ensure future results.

Managing the risks of investing in stocks

Stocks investors should weigh the potential risk of loss of principal against the risk of not meeting their investment goals or of losing purchasing power to inflation. They can also manage risk by:
  • Diversifying among stocks of many different companies. Investing in just one or two stocks is generally much more risky than buying stocks of 15 or 20 companies. By holding stocks of different companies in multiple industries, you reduce your exposure to a loss due to a price decline in just one stock. Remember, diversification does not eliminate risk.
  • Allocating assets appropriately. Asset allocation refers to how you spread your portfolio among different types of investments—such as stocks, bonds, and money market investments. An aggressive investor with a long-term horizon might choose to keep a large fraction of his or her portfolio in stocks, while an investor seeking less risk could have a smaller fraction. The balance in either case could be in bonds and money market funds. This adds yet another level of diversification to the portfolio and can further reduce investment risk. Your financial advisor can help you select an asset allocation that is appropriate for your goals and time frame.
  • Staying invested through periods of market turbulence can also help reduce risk of loss as the variability of returns tends to decrease over time.

The mechanics of investing in stocks

Individuals can buy stocks directly through a full-service or discount brokerage. They can also gain investment exposure to stock through equity mutual funds and other pooled investment products. Some employers offer their employees the opportunity to buy company stock through an employee stock ownership program or a retirement plan.
Because of their long-term potential, stocks have a place in nearly every portfolio.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.

1 Source: ChartSource®, DST Systems, Inc. For the period ended December 31, 2015. Large-cap stocks are represented by the S&P 500 index. Midcap stocks are represented by a composite of the CRSP 3rd-5th deciles and the S&P 400 index. Small-cap stocks are represented by a composite of the CRSP 6th-10th deciles and the S&P 600 index. Bonds are represented by the Barclays Aggregate index. Cash is represented by a composite of the yields of 3-month Treasury bills, published by the Federal Reserve, and the Barclays 3-Month Treasury Bills index. Foreign developed stocks are represented by the MSCI EAFE index. Past performance is not a guarantee of future results. It is not possible to invest directly in an index. Copyright © 2016, DST Systems, Inc. All rights reserved. Not responsible for any errors or omissions. (CS000168)

© DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

This material is authored by DST Systems, Inc. and was not authored by Merrill Edge. Assumptions, opinions and estimates constitute judgment from DST Systems, Inc. as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

Past performance does not ensure a profit or protect against loss.

This article is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person. Investors should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.

Banking products are provided by Bank of America, N.A. and affiliated banks. Members FDIC and wholly owned subsidiaries of Bank of America Corporation.

Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

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