Stock market investing: A miracle for the world
Throughout all of mankind’s history there has never been anything that has created as much wealth as the stock market. Millions of people have amassed their fortunes just by becoming invested. These facts alone should grab your attention, and make you long to get in on some of this action. Assuming you are diligent about saving up money and putting it to good use in the market, you might even be able to quit your day job sooner than you ever imagined.
Stocks – The first stop in the investment world
When entering the world of investing, it is prudent to begin with stock investing. This is simply because stocks are the most reported about and easiest to understand type of investment. Alliance Bernstein Investments defines stocks as something issued by companies that represent proportionate ownership interest in those companies. Put in layman’s terms, this means that you are purchasing a tiny piece of a company when you purchase its stock.
Types of stocks
There are an assortment of types of stocks that one may choose to invest in. Each of these varieties of stocks has its own benefits and disadvantages. Diversifying holdings among different types of investments is advisable to anyone who is getting their start in the market.
Large cap stocks
Large capitalization stocks, also known simply as large cap stocks, are representative of some of the largest companies in the world. Market capitalization is the total value of a company’s outstanding shares (investopedia). Thus, large cap stocks contain very high market capitalization. Since these companies are already very valuable, they are considered to be extremely stable investments. They tend to provide a reliable return on investment with little risk. At the same time, many of these investments provide dividend payments to loyal shareholders. These dividends are simply excess earnings that a company pays back to its shareholders. Dividends may be received as a cash payment, or they may be reinvested directly into more shares. Large cap stocks are defined as stocks with a market capitalization of more than $10 billion, and they are a good start for those first getting involved with the market (investorguide.com).
Mid cap stocks
Although the large cap stocks can provide stability, there is not much fun in that. Large cap stocks just do not provide the types of returns that mid cap stocks are able to on average. Mid cap companies can provide a little more excitement to investors. Having a few of these in your portfolio is a good way to remain interested in investing. A $1 billion to $10 billion capitalization earns a stock the title of mid cap.
Small cap stocks
Small cap stocks are the stocks that do not fit into the mid or large cap categories. These are the stocks of companies that have yet to make a huge impact in terms of profits. They have a value that is less than $1 billion. Many small cap stocks even have a market capitalization that is below $500 million dollars. This variety of stock is a great investment for those who don’t mind turning up the risk versus reward scale. If the small cap company you decide to invest in turns out to become highly profitable, then you stand to make a huge return on this investment. However, caution should be taken before throwing money into too many small cap stocks. There are plenty of companies of this size that just go bust. Investors in those companies stand to lose all the money they have invested.
International stocks
If opportunities are presenting themselves in the stocks of other countries, then why would you not invest in those opportunities? Obviously, you should take the chance to do this. However, you are going to want to be careful with this plan. The international companies do not have to report to domestic authorities in your particular area. For example, American investors cannot count on SEC reports from international stocks. This increase in risk is coupled with the potential for massive returns from this type of investment, but beginning investors should probably limit the amount of international stocks they are investing in.
Mutual Funds- Putting everything into one package
Mutual funds are a way to simplify the diversification process for anyone. These are investment vehicles that combine plenty of different types of investments all into one package. Thus, the investor only needs to put their money to work in the mutual fund to get a wide assortment of investments. This helps keep the investor protected against any of their investments going bad on them. Mutual funds generally provide a reliable return of ten percent per annum on average. Mutual funds come in about as many varieties as you can imagine. It is just a matter of selecting one that you believe will increase in value the most.
Actually investing- Choosing the right broker
Once you have reviewed all the types of investments that you could possibly get invested in, your final step is to select a broker. This is the middleman that will be in charge of making all of your transactions for you into the market. They charge you a tiny commission for this service, and they will be the one that you have your account with. Many small investors are finding that it is better for their profits to use an online stockbroker rather than a traditional one. With companies like ING Direct offering trades for as low as $4 through its website called sharebuilder.com, it is easy to see why online brokers may be the right choice for many.
Getting started in the stock market can be as terrifying as it is exciting. Fortunately, by just learning a little about how the place works, you too can start to make your fortune.