Stocks

Companies sell shares to raise money for growth or to pay off debt. Once issued, the shares trade among investors on stock exchanges, and the price moves as investors change their view of what the company will earn. As an owner you gain in two ways: the share price can rise, which is called capital appreciation, and the company may pay part of its earnings out as dividends. Price change plus dividends is your total return.

Neither part is guaranteed. Prices react to the company’s own results and to events it cannot control, such as recessions, interest rates and politics. If a company goes bankrupt, bondholders are paid first, then preferred stockholders, and common stockholders get whatever is left, which may be nothing. The market as a whole is bumpy too: the SEC’s Investor.gov notes that large-company stocks as a group have lost money in about one year out of three, while investors who stayed invested for long stretches, such as 15 years, have generally been rewarded.

The first split is by the rights a share carries. Common stock usually carries a vote at shareholder meetings and a claim on dividends and growth. Preferred stock usually has no vote, but its dividends are paid before any common dividend, and it ranks ahead of common stock if the company is liquidated.

Investors also sort stocks by size and behavior. Size is measured by market capitalization, the share price times the number of shares outstanding, which puts companies into large-cap, mid-cap and small-cap groups; the smallest are called microcaps. The labels overlap, so one stock can be large, blue-chip and a value stock at the same time:

Most people buy stocks through a broker, either in a taxable brokerage account or inside a retirement account such as a 401(k) or IRA. Every quote has two prices: the bid, the most a buyer will pay, and the ask, the least a seller will accept. You buy at the ask and sell at the bid, and the gap between them is a quiet cost of trading. A market order fills right away at the best available price; a limit order names the most you will pay, or the least you will accept, and may not fill at all. Since May 28, 2024, most US stock trades settle one business day after the trade, a cycle known as T+1.

Some companies sell shares directly through direct stock plans, and a dividend reinvestment plan uses your dividends to buy more shares of the same company. The simplest way to own many stocks at once is a fund. A mutual fund or an exchange-traded fund can hold hundreds or thousands of companies in one purchase, and an index fund that tracks the S&P 500 spreads your money across about 500 large US companies for a small yearly fee.

In a taxable account you owe tax on dividends each year and on gains when you sell. Qualified dividends from US and qualifying foreign companies are taxed at the same 0%, 15% or 20% rates as long-term capital gains, provided you held common stock more than 60 days during the 121-day period that begins 60 days before the ex-dividend date (some preferred stock needs more than 90 days within 181 days). Other dividends are taxed as ordinary income.

A gain is the sale price minus your cost basis. Shares held more than one year produce long-term gains; shares held one year or less produce short-term gains, taxed at ordinary income rates. For 2026, the 0% long-term rate applies to taxable income up to $49,450 for single filers and $98,900 for married couples filing jointly, and the 15% rate up to $545,500 and $613,700. Above that, the rate is 20%. Higher earners may also owe the 3.8% net investment income tax once modified AGI passes $200,000, or $250,000 for joint filers.

Inside a traditional 401(k) or IRA, dividends and gains are not taxed as they happen; withdrawals are taxed as ordinary income instead, and qualified Roth withdrawals are tax-free.

Stock risk comes in two layers. Company-specific risk, such as a failed product or an accounting scandal, shrinks as you own more different companies. Market risk, the tendency of most stocks to fall together, cannot be removed by owning more stocks; it can be offset only in part, for example by holding other assets such as bonds. That is why Diversification and asset allocation matter more to most savers than picking winners.

Investor.gov notes that people saving for a distant goal such as retirement may hold more stocks than bonds, and people near or in retirement more bonds than stocks. The retirement withdrawal studies behind the 4% rule concluded that retirees would generally do better with at least half of their portfolio in stocks. The common mistakes are mostly about concentration and behavior: