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Stocks: A Piece of the Pie
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When you purchase a company's stock, you own a piece (or a share) of that company and become one of that company's "shareholders," joining thousands (or perhaps even millions) of other owners. The value of your shares rise and fall according to the business' underlying success.
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Some companies will pay their shareholders part of their earnings each year, called dividends. The company's board of directors decides what the dividend payout per share will be. Your hope as a shareholder is that as the company earns more money and pays higher dividends, its stock value will increase. That way you can sell it for a higher price than you bought it for. Not all companies offer dividends, though. Many high-growth companies generally don't offer dividends as their strategy is to reinvest their earnings to fuel their growth.
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Unfortunately, you're neither guaranteed dividends (they're smaller and rarer now than they have been in the past) nor a higher selling price when you buy stock. In fact, stocks can be risky in comparison to the other major asset classes, such as bonds and cash. On average, however, stocks have typically offered the higher long-term earning potential of than bonds or cash.
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You usually buy a stock through a broker, though some companies offer their employees a stock-purchase plan. These plans usually give employees the right to purchase stock directly from the company at a price that is lower than what the general public has to pay. Some companies may also match the money you put into your retirement plan with an equal amount of company stock.
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Be careful, though, about having too much of one type of stock in your portfolio. Being overweight in one sector, stock, or investment type can be extremely risky.
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