It’s been a bumpy ride for stocks this year.
The stock market kicked off April with its worst start to the second quarter since the Great Depression. The Dow Jones industrial average fell 458.92 points. Meanwhile the S&P 500 fell 2.2 percent and the Nasdaq composite fell nearly 2.7 percent. Both closed in correction territory, although the markets have since rebounded, once again.
If you want to invest your money in the stock market despite the volatility — because historically it has given the best returns, returning an average of 8.6 percent per year from 2007 to 2016, for example — it’s good to know some basics, like exactly what it means to own stock.
When you buy stock, you own a small piece of that particular company. CNBC Make It spoke with Adam Grealish, senior investment researcher at Betterment, about the specific benefits and responsibilities of being a shareholder. Here are two key things to know.
1. You can receive dividends
When a company makes money, it can share its earnings with its stockholders. A dividend is a distribution of a portion of that company’s profit to its shareholders, but dividends are not guaranteed and a company can stop paying them at any time.
Typically, more mature and established companies pay dividends, normally monthly or quarterly, while newer companies do not. Start-ups are more likely to report losses in their early years, or reinvest any profits back into the company.
Stocks that pay dividends have, over time, outperformed stocks that do not.
A dividend “is generally a small cash payment,” explains Grealish, but companies may also distribute stock dividends, meaning that they will issue each shareholder a certain number of additional shares based on the number of shares they already own.
2. You can gain voting rights
In addition to receiving dividends, if you own voting shares, you get voting rights. “That means, as the company is making decisions, about board members, for example, you get a say,” Grealish tells CNBC Make It.
That said, “generally, individual investors are holding small enough shares where their votes are not going to sway the outcome necessarily, but this is more meaningful for larger shareholders who are buying a lot of shares so they can influence the direction of the company.”
In summary, when you buy a stock, you’re buying a fraction of a company, and that fraction may pay dividends and gain you voting rights.
Still, the main way people benefit from stocks is by buying and holding them for the long term. Investing legend Warren Buffett recommends holding stocks for decades. The patient investor will be rewarded, he tells CNBC: “The money is made in investments by investing, and by owning good companies for long periods of time. If they buy good companies, buy them over time, they’re going to do fine 10, 20, 30 years from now.”
Before you consider diving into the stock market, “you definitely want to take account of your personal financial situation,” says Grealish. “That includes assessing any debt you have and making sure you’ve paid down any high-interest debt. … The second thing is to make sure that your budget is such that you’re having extra money at the end of each week or each month.”
And, he adds, “make sure you have a cash emergency fund as well.”
