When it comes to increasing personal wealth, the stock market can be an appealing, if somewhat intimidating, prospect.
Investing in the stock market gives the potential for excellent returns, although it’s not without risk. If you are new to stock investing, it can seem a daunting task to try and understand the industry. The current low interest rates for other types of investments are attracting people of all experience levels back to investing in stocks.
What Is a Stock?
A stock is a type of investment that represents ownership in a company. When you buy a stock, you’re buying a small piece—called a share—of that company. The market value of your share can go up and down, depending on market forces.
Stock investments are one of the most common ways individuals build wealth over time. Investing in stocks has historically been one of the best ways to grow wealth over the long term, though it comes with risk, since stock prices can fall and companies can file for bankruptcy.
The two main ways to earn money from stocks is through capital gains and dividend payments. If you buy 100 shares for $100 each, you pay $10,000. If they increase in value to $125, you can sell them for $12,500. Before costs, that is a $2,500 capital gain. A downside with the capital gains is that you have to sell your shares to realize the profit. That is why some investors look for dividend-paying companies. A stock company can decide to pay their shareholders (owners) a portion of the company profits in the form of dividends. That way, you can get a payment from your stocks without having to sell them. Also, if you use the dividend money to invest in more shares, you can grow your investment portfolio without adding more money from your ordinary budget.
Why Companies Sell Stock
Companies sell stock to raise money. Instead of borrowing from a bank, they let people (investors) buy shares in the company. In return, those investors become part-owners. The money that comes in from the sale of shares can for instance be used to help the company expand, develop new products, or pay off debt.
Types of Stock
There are two main types of stock:
- Common stock, which usually comes with voting rights at shareholder meetings.
- Preferred stock, which gives preferential treatment when it comes to dividend payments, but usually do not come with voting rights.
You can read more about different types of stocks further down on the page.
Understanding the background
The roots of the stock company concept goes back very far, even if the term stock company is considerably younger. We can for instance find something quite similar to joint-stock companies if we go back to the Roman Republic, where the state contracted out many of its services to private contractors, and these government contractors formed companies and issued shares called partes or particulae. The orator Cicero mentions certain “shares that had a very high price at that time”, which indicates that the price of shares fluctuated in the Roman Republic.
In mid-13th century Tolouse, France, shares of the milling company “Société des Moulins du Bazacle” were traded, and their price depended on the profitability of the mills owned by the company. The earliest known example of a modern-style joint-stock company is the English East India Company, which was granted an English Royal Charter by Queen Elizabeth I in the year 1600. In 1602, the Dutch East India Company issued the first shares for trading at the Amsterdam Stock Exchange.
Stock Exchanges
Public companies, also known as exchange-traded companies, have their shares listed at one or more stock exchanges. Examples of well-known stock exchanges are the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE).
To be listed at an exchange, a company must fulfill a long list of stringent requirements, intended to make the investments more safe and give the market more faith in exchange-traded companies.
For public companies, share prices tend to change constantly based on supply and demand. A lot of factors can impact the market´s valuation of a company, including earnings reports, news events, and even rumors.
As an ordinary hobby trader or small-scale investor, you will not have direct access to a stock exchange such as NYSE or LSE. Instead, individuals who wish to engage in stock trading (short-term) or invest in stocks (longer-term) will sign up with a broker.
Why Are Stocks A Popular Investment?
Stocks have been one of the most powerful tools for building wealth over time. While they do come with risks, history has shown that investing in stocks generally result in strong long-term returns, outpacing inflation and most other assets. For anyone looking to grow their money over years—not just months—stocks are often one of the best places to start.
Stocks Offer Long-Term Growth Potential
Over the long run, stock markets have consistently trended upward, even after recessions and market crashes. Companies grow, economies expand, and share prices often reflect that growth. By investing in stocks, you’re essentially putting your money to work in businesses that create value over time. If the company does well, your investment grows with it.
Of course, there are plenty of examples of stock companies becoming insolvent and stock prices falling to zero. Investing in stocks is never without risk, not even if you stick to large and well-established corporations. Therefore, it is recommended to diversify your stock portfolio. Do not put all your eggs in one basket. Invest in a variety of stock companies, to make sure your portfolio value will not plummet if one company falls on hard times.
You Can Earn Passive Income Through Dividends
As mentioned above, some stock companies pay out dividends, which are cash payments made to shareholders using company profits. This means that even if you never sell your stock, you could still earn income just for holding it. For long-term investors, especially those focused on retirement, dividend-paying stocks can provide a reliable income stream while still offering capital growth potential.
Stocks Beat Inflation Over Time
Leaving money in a savings account may feel safe, but inflation eats away at its value. Stocks, on the other hand, tend to grow faster than inflation over time. This helps preserve and increase your purchasing power, making them a good option for long-term financial goals like buying a home, funding education, or retiring comfortably.
You Own a Piece of Real Companies
When you invest in a stock, you’re not just gambling on numbers—you own part of a business. This means you’re participating in the company’s success, with real products, customers, and profits behind your investment. That’s very different from speculative assets that don’t generate income or value on their own.
They’re Easy to Access and Diversify
With today’s technology, investing in stocks is more accessible than ever. You can buy shares or fractional shares through online brokerages, often with low trading fees. It’s also easy to diversify your holdings by investing in funds that invest in stocks, which will spread your money across many companies and reduce the risk tied to any single business.
If you want to pick individual stocks, study companies, and follow financial news, the stock market offers endless opportunity. If you’d rather be more hands-off, you can still gain exposure to the stock market through fund shares and just contribute regularly over time to your selected funds. Either way, stocks give you flexibility to match your style.
Note: Investing through a fund will not make you the owner of any stocks. You will not get voting rights.
Are Stocks the Right Investment Choice for You?
Stocks can be a powerful tool to build wealth, but they’re not a perfect fit for everyone. Before you jump into the stock market, it’s important to look at your financial situation, goals, personality, and risk tolerance. Investing in stocks can bring great rewards over time—but only if you’re prepared for the ups, downs, and unpredictability that come with it.
Do You Have a Long-Term Mindset?
If you’re looking to grow your money over the next 5, 10, or 30 years, stocks are usually a strong choice. They’ve historically delivered higher returns than savings accounts and bonds over long time periods. They can, however, also be bumpy in the short term, and if you’re someone who panics during market dips, stocks might not be the best option. The same is true for money that you will need to pull out in a year or two.
Stocks rise and fall. Sometimes dramatically. The value of your portfolio might go down 10% in a week, or even 30% in a year during a market crash. If the idea of that keeps you up at night or makes you want to sell at the first sign of problems, stocks could be too stressful. On the other hand, if you can stay calm and ride out the bad stretches of time, you are more likely to be able to manage a stock portfolio without it having a negative impact on your mental health and well-being.
What Are Your Financial Goals?
Ask yourself what you’re investing for. Retirement? A house in 10 years? Building wealth slowly over time? Stocks can be a great tool for all of those. But if you need money in the next year or two—for a vacation, emergency, or short-term goal—stocks are not where you want that money parked. They can fluctuate too much in the short term to be reliable for near-term needs.
Do You Have an Emergency Fund?
Before putting any money into the stock market, make sure you have a cash cushion (at least a few months’ worth of expenses) set aside in an easy-access savings account. Why? Because if you lose your job or face a surprise bill, you don’t want to be forced to sell your stocks in a down market just to cover the basics.
Are You Willing to Learn?
You don’t have to become a financial expert or memorize stock charts, but a basic understanding of how stocks work, what drives prices, and how to build a diversified portfolio is strongly recommended. Even more passive investors—e.g. those who invest through index funds—benefit from knowing the difference between a good investing habit and a costly mistake. Even as a passive investor, you are still the person who will have to decide which index funds to pick and when to remove your money from an index fund that is no longer aligned with your goals.
What to Consider Before Investing In Stock
Whether you have invested in the past, or it’s your first foray into the world of the stock market, there are a number of things you should consider before parting with your money.
What do you want to achieve? – You should decide what you want from your stock investments. Will this be a supplement to your income, or are you looking to become a full-time stock investor?
How long do you want to invest for? – The stock market has many different companies and options to choose from. There are types of investment such as over/under options that are more suited for short-term gains, while others will have to be looked at for long-term investments. You will need to decide on your investment strategy from the start.
How much do you want to invest? – The types of stock you buy may depend on how much you are willing to invest. There are some small-value stocks that may only require a small investment, but better-established stocks may need a bigger fund to buy them and get a return. You should consider how much you want to put into stock, and this should be something that you can afford to lose. Stock is not risk-free; the value may go up, but it can also go down.
Types of Stock Investment
Accessing the stock market is done in one of two ways; directly buying a stock (although known as ‘direct’, this is still through a broker) or buying through a pooled investment fund.
Direct Stock Investment
To buy stock with a company and become a shareholder, you will need to use a broker. There are many broker services to choose from. These offer everything from fully supported services, with tips on what to buy and when, to dealing accounts that let you buy and sell stock of your own choosing.
Indirect Stock Investment
Indirect buying in the stock market is more appealing to beginners. This is usually managed by a company that will represent many small investors. The group buying-power reduces fees and spreads the risk across many people.
Whichever way you choose to buy stock, you have the opportunity to make a difference to your personal finances. The best results are achieved by conducting lots of research into the company you are going to invest in, or to look at the background of an investment fund group before you put your money in.
The stock market does offer the chance to see big gains on your investment, although you should be prepared to see the value drop as well as go up.
Using Index Funds To Gain Exposure to Stocks
If you want to invest in stocks but don’t want the stress of choosing individual companies, funds that invest in stocks can be a good solution. An advantage with this approach is that you can get a significant diversification from day one, even if you only have a small amount of money to invest when you start out.
With funds, you invest in the stock market indirectly. You will be the owner of fund shares, but you will not own any of the stocks directly, as they are owned by the fund.
Actively managed funds are typically more expensive (in terms of management fees) than passively managed funds. If you are looking for funds with low management fees, index funds are a great place to start.
What Is an Index Stock Fund?
An index stock fund is a fund that invests in a basket of stocks and is designed to mirror the performance of a specific market index. Instead of trying to beat the market (like actively managed funds), index funds simply try to match it.
Simplicity, diversification and low management fees are some of the biggest advantages of the index funds. With one investment, you’re instantly diversified across dozens or even hundreds of companies. That reduces your risk—because if one company struggles, the impact on your overall investment is much smaller. Example: If you invest in a fund that tracks the S&P 500, your investment will be tracking an index based on the 500 largest publicly traded companies in the United States. Your exposure is automatically spread across big names like Apple, Microsoft, and Amazon, without you needing to buy each stock individually.
It is always important to read the fund prospect of the specific index fund that you are interested in, but generally speaking, index funds are passively managed and come with low management fees compared to actively managed funds. Since index funds don’t need a team of analysts trying to pick the next big winner, costs stay low. Over time, those lower fees can make a huge difference in your total returns. Remember, each $1 that you pay in management fees is $1 that can not be invested.
Index funds have become the poster-child of passive investing, a strategy focused on long-term growth instead of short-term gains. You’re not chasing short-term market trends or jumping in and out of stocks. You’re simply riding the market’s trajectory over the years, and – if we look at historical numbers – this approach has worked surprisingly well. Studies show that most active fund managers fail to outperform the market consistently, especially after accounting for fees. So, by matching the market through index funds, many investors end up doing better in the long run—with far less effort.
Types of Stock Index Funds
Index funds exist for many different kinds of stock market exposure. Here are a few examples:
- Broad market funds, like those tracking the S&P 500 or the total U.S. stock market.
- International index funds, which give you exposure to companies in several different countries.
- Sector-specific funds, for things like tech, healthcare, or energy.
- Mixed index funds, for those who want to balance stock risk with something else. You can for instance pick a fund that invests in a combination of stocks and income-generating bonds.
What are exchange-traded index funds?
An exchange-traded fund (ETF) is a fund where the shares are listed on a stock exchange, and traded in a fashion similar to stocks. This distinguishes it from a mutual fund, where the shares are normally only bought once per day.
An exchange-traded index fund is simply an ETF designed for follow a certain index. If you want to invest in an index fund, but also want to be able to buy and sell fund shares quickly, it can be an interesting option.
Some investors also like the increased vetting and high standards required for a fund to be listed with a reputable stock exchange.
Is an Index Fund Right for You?
If you’re looking for low-maintenance, long-term growth, index funds are hard to beat. They’re great for retirement accounts, monthly savings plans, or anyone who just doesn’t want to spend hours researching the stock market and picking individual stocks. You won’t get rich overnight with an index fund, but that’s the point. Index funds are about steady, compounding gains. Add to them regularly, hold for years, and let the market do its thing.
Different types of stocks
As you enter the world of stock investments, you will see a lot of different terms being thrown around to describe different types of stock. Some have a clear legal definition (e.g. preferred stock), while other terms are used more loosely. Below, we will take a look at a few different common terms.
While every stock represents ownership in a company, the kind of company, the way a stock behaves in the market, and the benefits it offers can vary a lot. Understanding the different types of stocks helps you make better decisions when building your investment portfolio—whether you’re after steady income, long-term growth, or a mix of both.
Common Stock vs. Preferred Stock
This is a legally defined distinction (and the exact rules can vary somewhat between jurisdictions).
Common stock is what most people think of when they hear the word “stock.” Owning common stock will give you ownership in the company and voting rights at shareholder meetings. You may also receive dividends, if the shareholder meeting decides that dividends will be paid out on common stock. If the company performs well, the stock price can rise, increasing the market value of your stocks.
Preferred stock, on the other hand, provide priority access to dividends. There is no guarantee that the company will pay dividends, but if any dividends are paid, preferred stock has priority. It is also legal for a company to pay dividends only on preferred stock. If a company goes bankrupt or liquidates in another manner, preferred shareholders are paid before common shareholders. Typically, you will not get any voting rights from preferred stock, as a kind of trade-off.
Preferred stock is also known as preferred shares, preference shares, and preferreds. It can be described as a kind of hybrid between a stock and a corporate bond—less risky than common stock, but usually with less potential for price growth as fewer investors are interested in preferred stock. In terms of claim (your rights to your share of the assets of the company), preferred stock has priority over common stock and are subordinate to bonds. Just like bonds, preferred stocks can be rated by major credit rating agencies, making it easier for investors to seek out the right level of risk-reward for their portfolio. Generally speaking, bonds are rated as lower risk than preferred stock form the same company, as preferred dividends do not come with the same guarantees as bond interest payments, and because preferred stocks give you a claim that is subordinate to those of all creditors (but not subordinate to common stock).
To know the exact terms and conditions for preferred stock, you need to read the issuing company´s articles of association, articles of incorporation, or equivalent. It is also important to remember that laws pertaining to preferred stock can differ depending on the jurisdiction.
Growth Stocks
When analysts talk about growth stocks, they mean shares in companies that are expanding rapidly, e.g. tech startups or innovative brands disrupting an industry. Growth stocks typically reinvest profits back into the business rather than paying dividends. Investors buy them expecting the stock price to climb significantly over time. The trade-off? They’re often more volatile and risky, and it is not that unusual for high-paced startups to fail completely.
Value Stocks
When an analyst talk about value stocks, they mean shares of companies that, according to the analyst, is undervalued by the market when you consider fundamentals like earnings or book value. These stocks tend to belong to well-established, slower-growing companies that may have been overlooked or temporarily out of favor among stock buyers. Investors who specialize in value stocks seek them out and buy them hoping the market will eventually “correct” the price upward.
Henrietta “Hetty” Green(1834-1916) is commonly hailed as one of the very first value investors in the United States, as she had a habit of buying unwanted assets at low prices and holding on to them until they rose in value. Founded in 1920, the investing firm Tweedy, Browne is known as the oldest value investing firm on Wall Street, buying stocks at a significant discount compared to book value. Today, a well-known and still active proponent of value investing is Warren Buffett, who has described his investment technique as “finding an outstanding company at a sensible price”.
Dividend Stocks
Dividend stocks belong to companies with an established history of regularly sharing profits with shareholders by paying dividends. They are often large and well-established companies found in sectors like utilities, consumer goods, and finance. Dividend stocks can be a great choice for investors seeking steady income along with the potential for capital appreciation.
Note: A company having a long history of paying dividends is not a guarantee that it will continue to do so in the future.
If you want to start looking into dividend stocks, a good place to start is by going through the companies that comprise the S&P 500 Dividend Aristocrats index. This index consists only of companies that have increased their dividends in each of the most recent 25 consecutive years.
Blue-Chip Stocks
The term blue-chip stock is not legally defined, but it denotes stocks from large, well-established and financially stable companies, with a strong track record of steady performance. Think Apple, Coca-Cola, or Johnson & Johnson. They’re not the most exciting investments, but they’re known for weathering economic downturns, and many of them also pay dividends.
Originally, the term blue-chip stock was associated with high-priced stock, as the blue chip was a valuable casino chip.
If you are interested in investing in U.S. blue-chips stocks, a good list to start exploring is the constituent list for the Dow Jones Industrial Average (DJIA). This is a price-weighted index comprised of 30 stocks that are all considered blue-chip. All of them are listed on exchanges in the United States, and the companies are all leaders within their respective industry. Examples of companies that have been included in this index since the 1900s are Procter & Gamble, 3M, IBM, Merck, American Express, McDonald´s, Boeing, Coca Cola, Caterpillar, Disney, and Walmart.
In the United Kingdom, the Financial Times Stock Exchange 100 Index (FTSE 100) is a good place to start looking for suitable companies if you want to invest in UK blue-chips stocks. This index is comprised of the 100 most highly capitalized blue-chip companies listed on the London Stock Exchange. Examples of companies included in the FTSE 100 (after 24 March, 2025) are AstraZeneca, Marks & Spencer, Rolls-Royce Holdings, BAE Systems, Unilever, BP, Shell plc, Coca-Cola Europacific Partners, EasyJet, HSBC, and Sainsbury’s.
Small-Cap, Mid-Cap, and Large-Cap Stocks
These terms refer to a company’s market capitalization—essentially, its total value in the stock market. Exactly where the line is drawn between small-cap, mid-cap, and large-cap can vary from one exchange to another.
Generally speaking, small-cap stocks often come from smaller, younger companies and can offer high growth potential but also higher risk. Mid-cap stocks are suitable for investors seeking a balance between growth and stability. Large-cap stocks are well-established companies, usually more stable but with slower growth and less potential for sudden price spikes. It is common to include a mix of all three in a diversified stock portfolio.
In the United States, a company with a market capitalization in the $250 million to $2 billion range is considered small cap at the time of writing. It is typically not able to secure prime borrowing rates, and is – statistically speaking – more likely to become bankrupt than mid-cap and large-cap companies. The U.S. range for mid-cap is from above $2 billion to $10 billion in market capitalization, followed by the large-cap level which require a market capitalization above $10 billion. Several other terms are also used in the United States, including nano-cap (less than $50 million in market cap), micro-cap ($50 million to $250 million), and mega-cap (over $200 billion).
Cyclical Stocks vs. Defensive Stocks
Cyclical stocks rise and fall with the economy. These include sectors like travel, construction, or luxury goods—things people spend more on when times are good. Defensive stocks tend to hold their value during economic downturns. Think healthcare, utilities, and basic food—industries that stay in demand even when the economy is slow.
Investing in Foreign Stocks
Investing in stock companies based outside your own country opens the door to new opportunities, different markets, and access to some of the world’s biggest and fastest-growing companies. It’s a way to diversify your portfolio, hedge against local economic slumps, and potentially tap into higher growth in emerging markets. But like anything in investing, it comes with its own set of risks, potentially extra layers of complexity.
Generally speaking, investors living in small countries such as Belgium or Panama are very used to investing in foreign companies – and this is true even for small-scale hobby investors. An investor based in a larger country, such as the United States, have a much larger domestic market available and can therefore be less eager to invest in foreign stock companies. Still, even someone based in a huge economy can benefit from reaching out and attaining an even higher degree of diversification than before.
If all your investments are tied to one country—say, just U.S. or just UK companies—your money is heavily exposed to the economic health, politics, and currency fluctuations of that single market. Foreign stocks let you spread that risk out.
Investing outside your own country can also give you access to industry giants that aren’t listed in your home market. Think of companies like Nestlé (Switzerland), Toyota (Japan), and BHB (Australia).
If you are based in a mature economy, you may wish to consider investing some of your resources in a less mature economy. Some of the emerging economies are growing really fast, which can translate into faster-growing stock companies and higher returns, though often with higher volatility.
How to Gain Exposure to Foreign Stocks
Pick a broker that give you international access
Many brokers let you buy international stocks directly. If you want to invest long-term, it is important that you pick a broker where the fee structure is suitable for this. Brokers focused on day traders and swing traders tend to charge over night fees as soon as you keep a position open over night.
Global Depositary Receipts & American Depositary Receipts
Global Depositary Receipts (GDRs) & American Depositary Receipts (ADRs) are certificates that can be used to buy foreign stocks on your local exchange (e.g., buying Alibaba stock on the NYSE via an ADR).
Mutual Funds & Exchange-Traded Funds (ETFs)
Instead of purchasing foreign stock outright, you can gain exposure to foreign stocks by investing in a fund that buys foreign stocks. There are many different niches to chose from, e.g. funds focusing on emerging markets, funds focusing on European blue-chip companies, and funds focusing on Asian tech. With a fund, you can be diversified from day one, even with a small investment.
What to Watch Out For
Currency Risk
When you invest in foreign stocks, you’re not just betting on the company—you’re also exposed to the exchange rate between your home currency and theirs. Even if the stock does well, a weak foreign currency could eat into your returns. Or, it could help you, if the foreign currency gains strength.
Different Regulations and Accounting Standards
Not every country plays by the same financial reporting rules. What looks like a solid balance sheet in one country might mean something very different elsewhere. You’ll also find different rules around subjects such as dividends, taxes, and shareholder rights.
Political and Economic Risk
Investing in a country with unpredictable politics or unstable currency can increase risk, even if its companies look attractive. Emerging markets often offer more growth potential, but they also tend to come with more volatility and less regulatory protection for investors. Of course, not all foreign markets are emerging markets.
Should You Invest in Foreign Stocks?
If you’re already investing and want to take your portfolio a step further, foreign stocks can be a smart way to add diversity and long-term growth potential. But you’ll want to do your homework—understand the region, track economic conditions, and be prepared for extra risks.
If you’re just starting out, a good compromise could be international stock ETFs or international stock mutual funds. They offer broad exposure to foreign stocks without requiring you to do deep research into each company.
This article was last updated on: April 3, 2025