If you look at a typical investment portfolio, more than likely there will be stocks (also referred to as equities) included. Stocks remain the staple for investors for one simple reason: they historically have worked. According to the Securities and Exchange Commission (SEC), stocks have performed better in the long run than most other types of investments—including bonds.1
What is a Stock?
As a whole, stocks may be strong investments, but this isn’t to say all stocks perform well. When you purchase a stock, you’re buying shares of a company. As a shareholder, you own part of the company and have the right to a portion of the company’s profit. But not all companies make a profit or even stay in business. On the other hand, some companies go on to great success.
If a company is privately held, it means that shares of its stock aren’t available for purchase. This is often the case with family-owned businesses or smaller companies that are just starting out. Company owners issue stock to the public and invite investors to purchase shares as a way to generate capital. This capital can be used by the company to expand their business in a variety of ways, from building new factories to entering new markets or even buying other companies. You may have heard that a company is “going public.” It means that the company is going to offer shares for sale over-the-counter or on an exchange for the first time. This Initial Public Offering (IPO) of a stock takes place after a full valuation by underwriters of the company’s current and potential worth, which allows an initial price to be assigned to the shares.
There are a couple of ways you can approach investing in stocks. There are two types of stocks: growth stocks and value stocks. Growth stocks are based on price appreciation. This means investors buy shares with the hope that the company’s share price increases over time. Since the broader stock market has historically trended upwards over the long haul (with some downturns along the way), price appreciation-based stocks are a popular way to approach investing. Of course the past performance of a stock is no guarantee of its future performance. When you sell a stock at a profit, you’re subject to a capital gains tax on that profit. Value stocks are stocks that are considered undervalued or discounted compared to industry peers, usually due to events such as a downturn in quarterly earnings or an industry-wide dip in sales. Value stocks tend to grow in value more slowly than growth funds.
Some companies—usually larger, more stable companies—pay dividends to shareholders as a way to share the profit. The dividends from these stocks are often paid on a regular schedule, giving shareholders a source of income. However, generally, a company can discontinue dividends at any time. Dividends are also dependent on the type of stock you own. The two types of stock shares you’ll most likely hear about are common and preferred. If a company pays dividends, owners of preferred stocks are paid first and at an established rate and schedule. Unlike common stocks, preferred stocks usually don’t have voting rights and are less likely to experience capital appreciation. If a company goes bankrupt, preferred stock shareholders are paid back after the creditors, but before common stock owners. This means that common stock holders are less likely to receive payout of any assets in a bankruptcy situation.
Investing in Individual Stocks vs. Stock Mutual Funds
As an investor just starting out, if you opt to purchase and manage stocks on your own, you could be facing several challenges. Individual shares of stock can be expensive and purchasing a group of stocks to achieve good diversification often requires a large financial investment. Without the benefits of diversification (which can help reduce market risk but doesn't eliminate it), your portfolio of a few stocks may be more volatile than you are comfortable with. However, individual stocks do offer a great degree of flexibility when it comes to which companies and industries you want to invest in.
With stock (or equity) mutual funds, depending on the fund’s objective, you’re given access to the stocks of a wide variety of different companies—foreign and domestic, large and small, from multiple industries—that may be price prohibitive for individual investors to purchase on their own. With a stock mutual fund, your investment is diversified and managed by skilled professionals to help you be better prepared for the inevitable periods of market uncertainty.
Stock Fund Types
Stocks are a key component of many mutual funds, but there are also funds that specialize exclusively in stocks. Here are the most common types of stock-based mutual funds. The market capitalizations listed are classifications generally found in the industry and may change based on market movement.
- Large-cap funds
Large-cap funds hold stock from companies that have a market value of $15 billion and up.
- Mid-cap funds
Mid-cap funds hold stock from companies that have a market value of between $5 and $15 billion.
- Small-cap funds
Small-cap funds hold stock with companies that have a market value of between $1 and $5 billion.
- Growth funds
Growth funds are made up of stocks with a high potential for price appreciation, but may not pay regular dividends.
- Value funds
Value funds are made up of stocks that are generally understood to be undervalued compared to industry peers, however they may be more likely to pay dividends.
- Income funds
Income funds (also known as dividend-paying funds) contain stocks that pay regular dividends but are not expected to have large share price appreciation. These funds may also contain bonds.
- Sector funds
Sector funds are concentrated on companies in a specific segment of the stock market, such as technology, natural resources, utilities, etc.
How you choose to invest ultimately comes down to your financial goals and the level of risk you’re willing to take on in exchange for potential return.
What Thrivent Mutual Funds Offers
Stock (or equity) mutual funds with Thrivent Mutual Funds are designed to give you access to a wide variety of carefully selected companies in a simple, yet flexible way, so no matter your goals, you can feel confident in the choices you’re making. When you choose to invest with Thrivent Mutual Funds, you’ll benefit from the expertise of our investment professionals and the convenience and choices we provide to make investing easier.
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