Experts divide stock into categories based on industries. These industrial categories are called sectors. Most financial advisors recommend that a diversified portfolio should include from five to teen stock in different industries. Familiar examples of industrial categories are retail, health care, technology and energy.
Sectors are important because many factors effect the economy in different ways. Some industries do well while others do poorly. For example, when the economy is doing well and wages are up, retail stores do well. When the economy is doing poorly, companies that provide necessities like health care or food do well, but retail stores do poorly. People have less money to spend on non-essentials. In this way, diversification helps protect your against large overall losses.
Showing posts with label investing. Show all posts
Showing posts with label investing. Show all posts
Tuesday, November 15, 2011
Monday, November 14, 2011
Investing - Diversitfication
The key to protecting your money when you invest is diversification. It means to have a variety of investments. Why should you diversify?
If you have all your money in stocks and the stock market goes down, your collection of investments will most likely decline at a rate that's similar to the market. Your collection of investments is called your portfolio.
But if two thirds of your money is invested in stocks and one third is in bonds, then you profolio will most likely decline less than the stock market. Putting some of your money ni stocks and some in bonds is an example of diversification.
You can diversity even more by putting together a combination of different categories of investments such as stocks, bonds, CDs and cash. You need to select a variety of investments within each category. You'll want to make as much money as possible while protecting the money that you invest.
If you have all your money in stocks and the stock market goes down, your collection of investments will most likely decline at a rate that's similar to the market. Your collection of investments is called your portfolio.
But if two thirds of your money is invested in stocks and one third is in bonds, then you profolio will most likely decline less than the stock market. Putting some of your money ni stocks and some in bonds is an example of diversification.
You can diversity even more by putting together a combination of different categories of investments such as stocks, bonds, CDs and cash. You need to select a variety of investments within each category. You'll want to make as much money as possible while protecting the money that you invest.
Monday, November 7, 2011
Investing - Exchanges, Brokers & Stocks
A share of stock represents a tiny share of a company. Stocks are sold in different stock markets or exchanges. The two major exchanges are the New York Stock Exchange (NYSE) and NASDAQ or the National Association of Securities Dealers Automated Qutation system.
To buy stock, you place an order with a broker. A broker is someone who completes transactions between buyers and sellers. There are different types of brokers:
full service- provide investment advice and recommendations
discount- place orders at a low price but limited advice
electronic- place orders over the Internet
In addition, some mutual fund companies offer brokerage services.
There are two types of stocks: common and preferred. There are two difference between the two types of stocks. A company will decide whether or not to pay a dividend or a percentage of it's earnings to stockholders. Preferred stock pays a guaranteed dividend. If a company goes out of business, their assets are used to pay off bond and stockholders. Preferred stockholders are paid before common stockholders. If there is no money left then common stock holders will not be paid.
To buy stock, you place an order with a broker. A broker is someone who completes transactions between buyers and sellers. There are different types of brokers:
full service- provide investment advice and recommendations
discount- place orders at a low price but limited advice
electronic- place orders over the Internet
In addition, some mutual fund companies offer brokerage services.
There are two types of stocks: common and preferred. There are two difference between the two types of stocks. A company will decide whether or not to pay a dividend or a percentage of it's earnings to stockholders. Preferred stock pays a guaranteed dividend. If a company goes out of business, their assets are used to pay off bond and stockholders. Preferred stockholders are paid before common stockholders. If there is no money left then common stock holders will not be paid.
Saturday, November 5, 2011
Investing - Rish and Reward
You invest because you think that you can make money. However, you can lose money too. That's risk. For example, you could buy a share of stock for $10 and it could increase in value to $50 or decrease in value to $0.
Some stocks are riskier than others. Often the riskier an investment is, the greater it potential gain. A larger potential gain can also mean a larger potential loss. How much risk is appropriate? It depends on three factors:
Your age. The younger you are, the longer yo have to gain back money you lose because you'll be working and investing for many years.
Your financial situation. If you support a family or your saving for a specific short term goal then you will want to take less risk.
Your personality. Some people are adventurous while others are nervous when they feel their money is at risk.
Some stocks are riskier than others. Often the riskier an investment is, the greater it potential gain. A larger potential gain can also mean a larger potential loss. How much risk is appropriate? It depends on three factors:
Your age. The younger you are, the longer yo have to gain back money you lose because you'll be working and investing for many years.
Your financial situation. If you support a family or your saving for a specific short term goal then you will want to take less risk.
Your personality. Some people are adventurous while others are nervous when they feel their money is at risk.
Friday, November 4, 2011
Why Invest?
Why invest? There are two major reasons for investing: retirement and increasing your wealth.
Nobody wants to work forever! One of the most important things you can do financially is invest for retirement. If you start now while you are young, the longer your money has to make a profit and the more you get from compounding.
There are two main types of accounts used for retirment investing: 401 (k) plans and individual retirement accounts (IRAs)
The 401 (k) plan takes its name from the section of the tax code that describes it. A company sets up this type of plan for its employees. Then the employees can contribute up to a certain percentage of their salary. In most cases, the company will match, dollar for dollar, the amount of oney that the employee contribues.
An IRA is established by an individual. You can have both an IRA and a 401 (k) plan. The amount of money that you can contribute is adjusted annually. There are two different types: traditional and Roth IRAs. In the tradition IRA, the money that you contribute is subtracted from your earnings before you pay taxes. Payment of taxes is deferred or put off until you withdraw the money later in life. This is great for people who expect to earln less money when they retire than while working. They will be taxed at a lower rate. Roth IRAs are contributions that are already taxed. You will not pay taxes on it when you withdraw it.
You should also invest to increase your wealth and gain financial security. Having money gives you the ability to realize many different goals. Put a little away on a regualar basis. You can build up savings to one day do what you want.
Nobody wants to work forever! One of the most important things you can do financially is invest for retirement. If you start now while you are young, the longer your money has to make a profit and the more you get from compounding.
There are two main types of accounts used for retirment investing: 401 (k) plans and individual retirement accounts (IRAs)
The 401 (k) plan takes its name from the section of the tax code that describes it. A company sets up this type of plan for its employees. Then the employees can contribute up to a certain percentage of their salary. In most cases, the company will match, dollar for dollar, the amount of oney that the employee contribues.
An IRA is established by an individual. You can have both an IRA and a 401 (k) plan. The amount of money that you can contribute is adjusted annually. There are two different types: traditional and Roth IRAs. In the tradition IRA, the money that you contribute is subtracted from your earnings before you pay taxes. Payment of taxes is deferred or put off until you withdraw the money later in life. This is great for people who expect to earln less money when they retire than while working. They will be taxed at a lower rate. Roth IRAs are contributions that are already taxed. You will not pay taxes on it when you withdraw it.
You should also invest to increase your wealth and gain financial security. Having money gives you the ability to realize many different goals. Put a little away on a regualar basis. You can build up savings to one day do what you want.
Saturday, October 29, 2011
Investing - Diversification
Investing in many things reduces the amount of risk that you are taking when making investments. You may choose to open a savings accoung, invest some money in the stock market and purchase some government bonds.
By doing so, you spread out your investment risk. By investing in many different investments, rather than one, you are ensuring that even if a one investment goes wrong, leaving you with loss or low returns, you will still make money on your overall investments.
Making several different investments as a way of reducing overall risk is called diversification. Investors diversify their investments so that no single loss can harm their financial situation in a serious way.
By doing so, you spread out your investment risk. By investing in many different investments, rather than one, you are ensuring that even if a one investment goes wrong, leaving you with loss or low returns, you will still make money on your overall investments.
Making several different investments as a way of reducing overall risk is called diversification. Investors diversify their investments so that no single loss can harm their financial situation in a serious way.
Friday, October 28, 2011
Investing - Risk and Reward
Each method of investing and every unique investment comes with its own risk and potential benefits. When you select an investment, make sure that you understand what the risks are as well as what type of investment will work best for your financial situation. Here are several different ways to invest your money:
Savings Account
Certificate of Deposit
Money Market Account
U.S. Bond
Mutual Fund
Stock
Collectibles
Where should you invest your money? You also need to consider the following when investing:
Safety - How risky is the investment? Safety is a measure of risk. A safe investment is one with little risk of losing money. An investment that is not considered safe may have a high likelihood of lsoing some or all of the money that you invest.
Liquidity- How easily can you get your money out of the investment? Can you afford to leave your money in an investment for a long period of time?
Return on investment - How much might your investment earn? Investments with a low rate of return might not make much money. But they also may not cost much to begin with.
Losing at the investment options listed above, collectibles is a risky investment but it could potentially bring a great rate of return. A savings account has very low risk, but it may not bring your a large return.
In order to make higher returns, you may need to invest more, but that may also mean that you risk more. Investments with lower potential returns may earn less, but you're less likely to lose your money. You need to think of each investment as a trade off between risk and reward.
Savings Account
Certificate of Deposit
Money Market Account
U.S. Bond
Mutual Fund
Stock
Collectibles
Where should you invest your money? You also need to consider the following when investing:
Safety - How risky is the investment? Safety is a measure of risk. A safe investment is one with little risk of losing money. An investment that is not considered safe may have a high likelihood of lsoing some or all of the money that you invest.
Liquidity- How easily can you get your money out of the investment? Can you afford to leave your money in an investment for a long period of time?
Return on investment - How much might your investment earn? Investments with a low rate of return might not make much money. But they also may not cost much to begin with.
Losing at the investment options listed above, collectibles is a risky investment but it could potentially bring a great rate of return. A savings account has very low risk, but it may not bring your a large return.
In order to make higher returns, you may need to invest more, but that may also mean that you risk more. Investments with lower potential returns may earn less, but you're less likely to lose your money. You need to think of each investment as a trade off between risk and reward.
What's an Investment
Investments allow you to make money with your money, allowing you to save more money over the long term and build wealth. Depositing money in a bank or credit union, buying stock in a company or buying a bond --- all of these are investments.
Choosing the right kind of investment for you and your money can be challenging. There are so many different types of investments. Each type carries with it unique risks. Some are so risky that they possibly cause you to lose all of the money that you invested, while others may make you very large profits (rewards).
Risk and reward are not the only things to think about when investing. You need to consider how easily it is to take your money out of an investment if you find that you need it or just want to withdraw the investment.
It's important to make investments with the long term in mind, find investments that suit your personal financial situation and understand that different investments have different kinds of return. You need to take all of these considerations into account when selecting investments.
Choosing the right kind of investment for you and your money can be challenging. There are so many different types of investments. Each type carries with it unique risks. Some are so risky that they possibly cause you to lose all of the money that you invested, while others may make you very large profits (rewards).
Risk and reward are not the only things to think about when investing. You need to consider how easily it is to take your money out of an investment if you find that you need it or just want to withdraw the investment.
It's important to make investments with the long term in mind, find investments that suit your personal financial situation and understand that different investments have different kinds of return. You need to take all of these considerations into account when selecting investments.
Saturday, October 8, 2011
Investing - Risk Tolerance and Capacity
Before you invest, it's important to consider both your risk tolerance and your risk capacity. Risk tolerance is your willingness to take on risk. Risk capacity is how much risk you can afford to take on given your financial situation. Both are equally important.
Most people are risk-averse. That means, with everything else the same, they would prefer less to more risk. It also means that they would prefer the highest expected return available for a given level or risk. It makes sense then that any investor would take on additional risk because they expect to earn a higher rate of return on that investment.
Think of it like this...there is a range of investment options available to you. The low risk option has a low rate of return but almost no risk, like a savings account or a certificate of deposit. For your parents, it might be sercurities issued and guaranteed by the U.S. government like a Treasury bill, note or bond. If you select this option you can expect to earn a low rate of return but the investment is not risky. Or in other words, your actual rate of return will be very close to the return that you expect.
The high risk option has a high rate of expected return but carries potentially a lot of risk. To select this option, you would need to be both willing and able to take on the risk associated with the investment. Potentially, you would need to be both willing and able to lose your investment.
Read more about risk and return at FINRA's Investing Strategies web site.
Most people are risk-averse. That means, with everything else the same, they would prefer less to more risk. It also means that they would prefer the highest expected return available for a given level or risk. It makes sense then that any investor would take on additional risk because they expect to earn a higher rate of return on that investment.
Think of it like this...there is a range of investment options available to you. The low risk option has a low rate of return but almost no risk, like a savings account or a certificate of deposit. For your parents, it might be sercurities issued and guaranteed by the U.S. government like a Treasury bill, note or bond. If you select this option you can expect to earn a low rate of return but the investment is not risky. Or in other words, your actual rate of return will be very close to the return that you expect.
The high risk option has a high rate of expected return but carries potentially a lot of risk. To select this option, you would need to be both willing and able to take on the risk associated with the investment. Potentially, you would need to be both willing and able to lose your investment.
Read more about risk and return at FINRA's Investing Strategies web site.
Friday, October 7, 2011
Investing - Stocks Ups and Downs
There's a lot to learn when you invest in shares of stock. First, you need to expect the prices of those stock shares to go up and down. They will --- often every day! Here are some of the many reasons why a stock price will increase or decrease:
- increase or decrease in sales or profits
- change in corporation's management
- change in products or services
- a famous investor buys or sells shares of stock
- a well-known analyst upgrades or downgrades their evaluation of the company
- research reveals something good or bad about the corporation's products
- the corporation wins or losses a lawsuit
- a lot of people are either buying or selling their shares
- the stock market is either up or down
- positive or negative media coverage toward the corporation
- rumors
Thursday, October 6, 2011
Investing - Risk
Everyday, we all take risks without even thinking about it. When you invest your hard, earned money, you need to think about what you expect for your return and how much you are willing to risk to get that return.
You can stash your cash in your top dresser drawer. There's no risk involved. But, it won't grow other than when you add to it. That means it has a zero growth rate. The up side it that it's always at hand. You don't have to drive to the bank to get it or you don't have to wait until it matures to withdraw it.
You want more than a 0% growth rate? Then, decide how much you expect to make from your investments and look at the risks involved. You'll need to strike a balance between your expectations and the risks involved to achieve them. Your bank or credit account, certificate of deposits, money market funds are insured. Ask to make sure! They have a little more risk but a larger growth rate.
Over the long term, stocks often offer a better rate of return. There are more ups and downs.
You can stash your cash in your top dresser drawer. There's no risk involved. But, it won't grow other than when you add to it. That means it has a zero growth rate. The up side it that it's always at hand. You don't have to drive to the bank to get it or you don't have to wait until it matures to withdraw it.
You want more than a 0% growth rate? Then, decide how much you expect to make from your investments and look at the risks involved. You'll need to strike a balance between your expectations and the risks involved to achieve them. Your bank or credit account, certificate of deposits, money market funds are insured. Ask to make sure! They have a little more risk but a larger growth rate.
Over the long term, stocks often offer a better rate of return. There are more ups and downs.
Wednesday, October 5, 2011
Investing - Growth Rate
The growth rate or how fast your money grows from year to year is really important. In our compounding example, we used a growth rate of 10%. That's how fast your money grew over the time that you had it invested.
Your money will earn more or less depending on where and how you've invested it. A typical bank account will earn about 5% each year. Shop around to find the best rate. Read the Smart Banking post to get some ideas on how. There are other ways for you to invest your money and get a different growth rate.
A certificate of deposit (CD) is an investment option available at a bank or a credit union. It's kind of like a saving account but different. Here's how it works. You deposit a sum with bank, wait a specified period of time, and then withdraw the sum plus interest. It' s kind of like you are loaning the bank your money to use for a specified time period and they are paying you for the right to use your money. The time period is anywhere from three months to six years.
Another way for you to invest your money is by purchasing stock. What is stock? Basically it means that you own a piece of the company or in other words you have a claim on the company's assets and profits. Ownership is determined by the number of shares that a person owns divided by the total number of shares outstanding.
So, if you own 50 of the 1000 share of stock that a company has outstanding then you own 5% of the company. Only a specific type of company, a corporation, can issue stock. While stock often provide a higher growth rate, there is more risk involved with investing your money in them.
In the next post, we'll talk about risk.
Your money will earn more or less depending on where and how you've invested it. A typical bank account will earn about 5% each year. Shop around to find the best rate. Read the Smart Banking post to get some ideas on how. There are other ways for you to invest your money and get a different growth rate.
A certificate of deposit (CD) is an investment option available at a bank or a credit union. It's kind of like a saving account but different. Here's how it works. You deposit a sum with bank, wait a specified period of time, and then withdraw the sum plus interest. It' s kind of like you are loaning the bank your money to use for a specified time period and they are paying you for the right to use your money. The time period is anywhere from three months to six years.
Another way for you to invest your money is by purchasing stock. What is stock? Basically it means that you own a piece of the company or in other words you have a claim on the company's assets and profits. Ownership is determined by the number of shares that a person owns divided by the total number of shares outstanding.
So, if you own 50 of the 1000 share of stock that a company has outstanding then you own 5% of the company. Only a specific type of company, a corporation, can issue stock. While stock often provide a higher growth rate, there is more risk involved with investing your money in them.
In the next post, we'll talk about risk.
Tuesday, October 4, 2011
Investing - Compounding
You have some money that you've earned and stashed in your saving account. Now it's time to watch it grow. Yes, it can grow a lot.
If you leave your money to grow for a long time, $100 can turn into a million dollars. The longer you leave your money, the more it grows. It's called compounding!
It depends on three things:
- how much you invest
- how long you invest it
- the rate of growth
When something grows over time, the amount by which it grows also grows.
For example, if you start with $100 and a 10% growth rate, you will earn $10 the first year that you invest it. If you leave that $110 alone and don't spend it, then the next year you will have $121. 10% of $110 is $11. You have the originial $100 plus the $10 you earned the first year and an $11 dollars that you earned the second year.
Your inital investment of $100 is growing and the amount by which it's growing is also growing. That's compounding.
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