The stock market is one of the most popular among investors, but it is important to take some precautions and better understand its dynamics.
After understanding the importance of investing and the benefits of not leaving money idle , it becomes important to explore the different classes of financial assets that exist . In this article, we will discuss one of the main and most popular types of investment in the capital markets, accessible to the common investor – the stock market.
What is investing in the stock market?
Investors can invest in a variety of different companies, as long as they are listed on the stock exchange, by purchasing their shares directly on the market. Investors thus become shareholders, owners of a small part of each company in which they have invested. In this way, each investor can select the companies with which they most identify, which they consider to have the greatest growth potential, which are in line with their investor profile, which have a greater capacity for innovation and competitive advantages in the industries in which they operate.
By being an owner of stocks in companies, the investor is subjected to their business performance, news that are applicable to them and can influence them, outlook for these firms and industries where they operate, among others, which cumulatively will impact the development of the price of their stocks in the stock exchange.
Therefore, if the company presents good management and corporate performance, as well as favorable future prospects, we will tend to see an appreciation in its share price over time – translating into a positive return for the investor. On the other hand, if market sentiment towards a share is negative, due to poor corporate results, future prospects below estimates, or any other less favorable factor, we will tend to see a depreciation in its share price – translating into a negative return for the investor.
At the same time, investors may obtain income through dividends. In fact, companies may choose to distribute part of their profits to shareholders through periodic dividends , thus allowing investors to obtain a source of periodic income without having to sell their shares. This is a way for investors to obtain a predictable and periodic future income – by including shares of dividend-paying companies in their investment portfolio, investors will receive money periodically.
How to invest in a diversified way?
Investing in a diversified manner can bring several benefits to the investor, mainly in terms of reducing the specific risk of exposure to individual companies and the ease and efficiency of including a basket of companies linked to a certain geography, sector or theme in the investment portfolio.
Therefore, in addition to the possibility for investors to choose individual shares of listed companies to build their investment portfolio, it is also possible to invest in a diversified manner through ETFs ( Exchange Traded Funds) as well as Investment Funds.
These vehicles allow investors to acquire a basket of companies quickly, simply and efficiently , benefiting from the concept of diversification and reducing the risk inherent to individual companies. Investors can then choose the geography(ies), sector(s) or investment theme(s) that they see as having the greatest interest and potential, and include them in their investment portfolio by purchasing a basket of companies linked to them through ETFs or Investment Funds, immediately and simply.
Diversification, accessibility, cost efficiency, transparency, global exposure, among others, are some of the main advantages of this type of product, which has been facilitating and democratizing access to financial markets for ordinary investors.
What is the history of the stock market?
Investing in the stock market is actually one of the most widespread forms of investment, and one that has experienced most significant growth over time, if we consider, for instance, the leading diversified reference indices, such as the S&P 500, which gathers the leading 500 North American firms, or the EuroStoxx 50, which gathers the leading 50 European firms.
For example, the S&P 500 index has shown an average annualized return of between 8% and 10% over the last few decades, thus being synonymous with accelerated and consistent growth over time , even despite negative periods caused by economic, financial, geopolitical, social or even pandemic crises.
However, it is also important to note that, in general, the stock market is, historically, one of the asset classes that presents the highest risk , being subject to unpredictable performance and significant price fluctuations. It should also be noted that past performance does not, under any circumstances, represent any guarantee of future returns.