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Stocks represent ownership in a
Each stock is a share of ownership. The more shares you own, the
greater your ownership.
corporation earns a profit, some of the profit may be passed on to you in the
form of dividends.
When a stock grows in value, you can sell it and make a profit
(a capital gain).
Over the long run, stocks have outperformed every other type of
investment. They have also kept ahead of inflation. This is because the returns
on stocks are not fixed, as the returns of many other investments are. Stocks
have unlimited earning capacity.
Stock investments are favored by short-term speculators and
long-term investors. Short-term speculators try to take advantage of the
short-term volatility of stock prices to "buy low" and "sell high." Long-term
investors ignore the daily fluctuations to take advantage of the potentially
higher long-term returns experienced in the stock market. Long-term investors
may also enjoy dividends paid by successful companies in which they invest.
Easy diversification is the chief advantage of mutual
funds, which we will discuss next.