STOCKS

Stocks represent ownership in a corporation.

Each stock is a share of ownership. The more shares you own, the greater your ownership.

When the 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.