Educational information, not individual financial advice.
Key Takeaways
A stock (also called an equity or share) is a tiny piece of ownership in a company. If you own 100 shares of Apple, you own a microscopic fraction of Apple's assets, profits, and future cash flows.
Two ways:
Capital appreciation. You bought a share for $100 and sold it for $150. Your $50 gain is a capital gain, taxed preferentially if you held for more than a year.
Dividends. Many mature companies return some profit to shareholders as quarterly cash payments. Qualified dividends are taxed at long-term capital gains rates.
Over decades, capital appreciation dominates the return for most broad stock portfolios. Dividends contribute about 1.5–2% annually to U.S. total stock market returns, while appreciation contributes 5–6% real.
Common stock — what most people hold. Voting rights at annual meetings; last in line if the company is liquidated.
Preferred stock — usually no voting rights, but higher-priority dividends and payment in liquidation. Behaves somewhat like a bond.
Large-cap, mid-cap, small-cap — categories by total market value. Large-caps are established companies ($10B+); small-caps are smaller companies ($300M–$2B) with more growth potential and more volatility.
Growth, value, and blend — growth stocks trade at high valuations because they're expected to grow earnings quickly; value stocks trade at low valuations, often because they're in mature or out-of-favor industries. Academic research ("factor investing") has debated whether value systematically outperforms growth over long periods — the answer appears to be sometimes, but with long stretches of the opposite.
U.S. stocks have returned about 10% per year nominally, 6.5–7% real, since 1926. But that average hides enormous variation:
The 6.5–7% real number only shows up over long horizons. Over any 1-year period, a 40% loss is within historical range. This is why equity exposure should be matched to time horizon.
Picking individual stocks is entertaining and occasionally lucrative, but the empirical results are unforgiving. Academic studies of individual-investor trading have consistently found:
For the vast majority of investors, diversified index funds capture the market's long-run return without the tails.
About 40% of global market capitalization is outside the United States. Most investors are significantly overweight U.S. stocks in their portfolios, partly because of familiarity and partly because U.S. markets have outperformed in recent decades. The theoretical case for international diversification is strong, though outcomes vary by period.
In Horizons, you classify each investment asset by strategy (aggressive, moderate, conservative, cash). Aggressive strategies assume a high equity allocation with corresponding expected returns and volatility. As you move toward retirement via your allocation schedule, the stock allocation typically drops and the bond allocation rises.
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