 |
|
 |
 |
 |
 |
 |
 |
 |
 Stocks Perhaps one of the most time-tested and best methods of building your wealth is throughout the acquisition or purchase of stock in various companies, whether they are domestic or international companies. Over a long period of time, these investments, on average, may pay the highest rate of return. Stocks and stock prices can be followed on the New York Stock Exchange and the American Stock Exchange, which has now merged with the NASDAQ Stock Exchange. It is also an over-the-counter market for smaller company stocks. As a rule, in times of relative economic prosperity, stock prices in the stocks of companies are fairly good investments and provide a fair accumulation of either income or, at least, stockprice increases. While the rates of return may be significant over time, there are various periodic upturns in the economy, which may affect the overall stock market as a whole, or various industries or economic downturns which may affect certain stocks. There may also be downturns with particular companies and that may affect the stock price of that company. These factors, as we have seen in the earlier portion of this web-site, show that the risks associated with these investments are more significant than those associated with money market accounts. As a result, the returns can be higher. Stock investors must be careful to pick stocks that are likely to meet the conditions of their industry so as to be either leaders or at least companies that keep up with rates of return for similar stocks in their industry. This also illustrates why diversification, that is buying, a number of stocks in a number of different industries, may be the better hinge against downticks in economies, industries or with particular companies. In order to properly diversify one must spend a certain amount of time researching stocks, rates of return, industry conditions, and the prospects of future development and competition for those companies. Often, this knowledge is not available to the individual investor, or the individual investor does not have the time to undertake this significant amount of research. As a result, stockbrokers are often employed to help make individual investment decisions. Financial planners may also assist in this regard, and may, at times, be even more objective than stock brokers in selecting certain types of stocks. Stock brokers, of course, make commissions on the sales of stock, and most large stock broker firms are on any given occasion "pushing" a particular stock throughout the organization to their customers or clients. A financial planner may have none of those constraints or pressures and can possibly advise in a more objective fashion. Information regarding daily stock prices can be obtained from several sources, most notably The Wall Street Journal, television, Business Investors Daily, a significant number of monthly publications such as Fortune or Forbes, a variety of newsletters to which investors can subscribe, and a number of other sources. Reports on stocks for a company, unless suspended or a certain situation exists is usually published on a daily basis in one of those publications. The Internet also provides an instantaneous, in most cases, of the "stock price" at any given time during the day. These can all assist individual investors in purchasing and selling stocks. Certain publications like The Wall Street Journal publish daily rates of return on many stocks, so that one can tell at any given time during the year how much a rate of return the stock is earning year to date (YTD). Depending on your financial planning goals, it may not be necessary for you to follow the daily or even the weekly stock price changes in the investments you have, once you have made them. However, it is a good idea to plan for income levels and to follow certain stocks prior to investing in the stock to make a determination of whether that stock is on the rise or on the decline. Many people invest in a particular stock "on paper" from a specific day at a specific price to determine whether that stock has any potential investment value six months or a year down the road, when some of the money may be available for additional investment. This is a very common and highly recommended method of selecting certain stocks. Of course, this requires that you have some knowledge of the company prior to making the investment in order to even commence the "paper" investment period. What Determines the Price of a Particular Stock? The great thing about investing in stocks is that common stock is related to the company’s current and future earnings, which usually mean quarterly earnings. So a calculation for its underlying asset value. While financial experts become absorbed in even more minute details and ratios concerning each company, it is useful to understand the basic stock pricing functions. Associated With Stocks. Over time, stocks will be more risky, but will produce better returns than fixed income securities. Various types of stocks can provide even more details with respect to this list. As a general rule, stocks can be divided into three categories: (1) Large company stocks including blue chips, such as IBM, Coca-Cola, and Exxon; (2) mid-cap stocks; and (3) small-cap stocks. The large company stocks, are the safest types of stocks and also provide the safest rate of return. Because of their own diversification, certain economic conditions in the United States, or in other countries in which they operate, may or may not affect the actual value of the company in any given time period. Operations in section of the company may also be offset by lagging operations in another, consequently the stock price remains fairly solid. Small company stocks on the other hand may be fairly volatile, since they may not be as diversified and may be much more subject to economic or industry fluctuation and pressures. A company operating in Houston, Texas in the late 1980’s oil industry group, no doubt felt the downturn in the Houston, Texas economy at that time. Especially if it was a small company with operations only in that part of the United States. However, Exxon which is headquartered or has operations in Houston, Texas, probably did not experience a company wide downturn in its revenues or earnings, because it was diversified. An Example of Different Rates of Return The Wealth Indices Chart, linked here, indicates that a thousand dollar invested in 1925 would return a varying degree of investment income through 1980.
|
