Stocks are ownership shares in a corporation.

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You can buy stock in thousands of publicly traded companies, though chances are your portfolio will include only a tiny fraction of what’s available.

When you buy stock in a corporation, you become one of its owners. If the company does well, you may receive part of its profits as dividends and see the price of your stock increase. But if the stock price falls, the value of your investment can drop, sometimes substantially.

A stock has no absolute value. At any given time, its value depends on whether its shareholders want to hold it or sell it, and on what other investors are willing to pay for it. If the stock is hot, and lots of people want shares, the price may go up. If a company is losing money or a particular industry is doing poorly, those stocks may drop in value. Some stocks are undervalued, which means they sell for less than analysts think they’re worth, while others may be overvalued.

Investors’ attitudes are determined by several factors: whether or not they expect to make money with the stock, by current stock market conditions, and the overall state of the economy. The caution that past performance is no guarantee of future profits is absolutely valid. Investing isn’t about guarantees. It’s about balancing risk with reasonable expectations of reward.

Market Cycles

Investor Concerns

Some people hesitate to invest in the stock market because they consider it too risky, especially if they assume themselves are a beginner. Afraid of choosing the wrong stock or being battered in a bear market, they prefer to stick with investments they consider safe.

The stock market goes through cycles, heading up for a time, and then correcting itself by reversing and heading down. A rising period is known as a bull market — bulls being the market optimists who drive prices up. A bear market is a falling market, where stock prices fall by 20% or more and may remain depressed. Overall, the market has tended to rise higher following a fall. But bear markets can take a big bite out of your portfolio’s value in the short term.

Tax Issues

The dividends you earn on stocks and any capital gain, or profit, you have when you sell are taxable in the year you execute the trade unless you bought the stock as part of an IRA or qualified tax-deferred retirement plan.

Stock Opportunities

You can select stocks on your own, with the help of your financial adviser, or as part of an investment club.

Most clubs are formed by friends or associates with similar investment goals. By pooling their money — usually a fixed amount each month — and sharing responsibility for researching various companies and industries to find smart investments, the group may be able to achieve greater diversification than most investors can manage on their own.

Some groups work with a financial adviser or invite people with different investment expertise to speak at their meetings. Others pride themselves on their ability to choose wisely among themselves. And as an added plus, some investors use their colleagues’ research to make individual investments in addition to those made through the group.

You can get information about how to establish an investment club and a description of the guidelines that most clubs follow from the National Association of Investors Corporation (NAIC). You can call them at 877-275-6242 or visit them on the Internet at www.better-investing.org

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