Investing in stocks involves owning part of a company’s equity which effectively enables the shareholder to receive a portion of the company’s earnings and assets in form of dividends. Stocks are generally categorized as either common stocks or preferred stocks whereby common stock allow investors to vote on key issues but do not guarantee of dividends (Markowitz 78). Preferred stocks on the other hand do not provide voting rights but assure stockholders of dividend payments. Investing in stocks offers investors comparatively high returns relative to treasury securities but the investments also have high inherent risk. Stocks are purchased through licensed stockbrokers who range from the discounted order-taking online brokers, to the pricey full-service brokers and money managers (Sourd 112). Despite the type of broker an investor opts for, the stock market has the potential to generate high returns through an investment strategy. One of the main strategies employed is diversification which involves the purchasing of different stocks with varied performance and rates of returns in order to spread out the risk of the individuals stocks across a portfolio. Investing in stocks is therefore one of the most profitable alternatives of personal financial planning, and should be considered as one of the investment vehicles that generates an additional income stream.
Significance of Stocks in Personal Finance
Personal income is considered to be a person’s total earnings which can be obtained through wages and salaries, personal business activities, social aid and investment. The choice to invest one’s finances rather than spend on consumption has an overall impact of increasing income as a result of future cash inflows from the invest...
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...g is also important in fulfilling financial obligations such as debt capital, annuities as well as savings. An effective personal financial plan should manage risk through diversification of investment capital, and the stock market provides investors with a viable option for diversification. Investing in stocks is considered one of the most profitable alternatives of personal financial planning, and is generally included to financial plans as an investment vehicle for additional income streams. Investing in stocks also has several benefits, key among them being increasing current and future cash inflows from investments. In addition, stocks offer investors a viable option through which they can achieve their financial goals for retirement, saving or consumption. Stocks are therefore useful securities that can be used to build wealth and secure financial stability.
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