Of all the investment vehicles available, stocks generate the most interest because they yield the highest rate of return. However, they also carry the highest risk. The volatile nature of stock prices makes it possible for fortunes to be made and destroyed literally overnight.

Stocks are, in effect, pieces of paper that entitle you to partial ownership of the company. Companies sell stock over the stock exchange in exchange for money. There are different classes of stock, with common stocks being the most typically used.

Investing in equities or stocks has many advantages, chief of which is the high rate of return that is unmatched by other investment alternatives. The return from stocks has outpaced inflation, which makes stocks a necessary part of every investor's portfolio. While stocks have the added advantage of being fairly liquid assets that can be sold quickly and efficiently, it is generally not recommended for investors to buy and sell stocks in rapid succession. Firstly, you will incur charges in terms of broking commissions and tax. And more importantly, it is not easy to predict the direction of the stock market. Even the experts have trouble doing that. The best strategy is to hold a stock with good fundamentals over the long term.

Different Categories of Stocks

Stocks can be categorised under different types to fit the investor's goals and risk tolerance.

Growth stocks have good prospects for growing faster than the economy or the stock market in general. Investors buy them because of their good record of earnings growth and the expectation that they will continue generating capital gains over the long term.

Blue-chip stocks are generally safe and reliable, being rated of high quality. They tend not to have vast price swings but generate decent dividend income and some growth. The term applies to the stocks of the largest, most consistently profitable corporations, but a blue-chip stock may not stay "blue-chip" forever.

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