Investing In The Stock Market

There are many people out there wondering what they should be doing to grow their wealth.  There is no single best way to invest money, but there are a lot good options.  What option you choose depends on your personal goals, time lines, and risk tolerance.  Some will prefer to take a more active role in their investments, other prefer to keep things passive.  With that being said, here are some good ways to invest your money.

Invest In Mutual Funds

For many people, this is probably the best option.  By investing in mutual funds, you are reducing your involvement with your investments, freeing up your time for other activities that are more important to you.  There are two major types of mutual funds:  managed, and unmanaged.  Managed funds employ a professional fund manager to buy and sell investments within the fund.  In exchange for this service, he receives a salary, collected as a fee from the purchasers of the mutual fund.   The idea here is that he will make more money for the fund than he costs it in management fees.

Often, though, this is not always the case, and this is where unmanaged funds come in.  Unmanaged mutual funds, rather than having a manager picking the stocks, blindly follow a certain stock market index.  For this reason, unmanaged funds are often called index funds.  The most common index for funds to follow is the S&P 500, but there are funds which follow pretty much every other major index out there.  The low expenses (no fund manager, you see) can make these an excellent invest choice.  I’ve written before about investing with index funds, so be sure to read up that to learn more.

Invest In Stocks and Bonds

If you’re looking to take a more active role in your investing plan, you can research and purchase individual stocks and bonds.  If you choose well, you can grow your money quite effectively.  In order to take this approach, you will need to learn how to buy and sell stocks, as well as determine the best stocks to buy.  If you can do this effectively, individual stocks and bonds can be a very good investment strategy.

Invest In A Business

Want to get really active in your investing?  Try investing in a business, either yours or someone else’s that you are extremely familiar with.  This is often the very fastest way to grow your money, but it is also the riskiest.  Unless you are very familiar with what makes money and what does not within your business, be careful about  throwing money at it.  Money doesn’t do you much good without a solid profit plan.  If you do it right, though, no other investment will give you the same return as a good business can.  However, you will spend much more time managing this sort of investment than any other.

Conclusion

As you can see, there are many different ways to invest money,  each with their own associated risks levels and rewards.  To determine the best investment strategy for you, be sure to take a good hard look at your own risk tolerance and the amount of time you are willing to spend.  With that being said, don’t over think things so much that you never start investing!  Make a decision, and start investing as soon as you can.  Time is your greatest asset in the world of investing, so use it wisely.

On this site, I often write about the virtues of investing in the market with index funds.  This is a good strategy, and is what I practice myself.  However, there is also something to be said for the purchase of individual stocks.  When we think of the world’s greatest investors, we are thinking of those who have made wise decisions in purchasing individual stocks.  Warren Buffet immediately comes to mind, as do a slew of others.

Of course, the real challenge when it comes to purchasing stocks is determining the best stocks to buy.   As you might imagine, I don’t have any simple answers for you here.  At best, I can give you some general strategies that work for a lot of people, and you can do your own research and see what works best for you.  I make no claims as to the general effectiveness of these methods, so use at your own risk.  With out of the way, here are some popular stock selection strategies.

photo credit: quinn.anya

Value Investing

Value investing could well be called the “school of Warren Buffet,” though it was actually originally outlined by Buffet’s mentor, Benjamin Graham.  In his book, Security Analysis, Graham lays out the classic rules of stock picking based on value.  In this school of thought, investors are trying to beat the market by selecting stocks that are undervalued at their current market price.  This is determined by a careful analysis of the company’s balance sheet, with estimates made of the future earning potential.  If the company’s future earnings potential is more than the stock price would indicate, the stock is considered a good value.  A simpler form of this approach is to buy stocks with a low price to earnings ratio (P/E ratio).

Growth Investing

In this school of investing, the best stocks are those that have the best growth potential.  Stocks are picked on companies that appear to be ready to grow greatly in the future, as determined by the investors research.  These types of stocks will rarely pay out dividends, as they are investing every cent back into growing the company as fast as possible.  Many investors do well with this investing style.

Penny Stock Investing

This is not a strategy pursued by most real financial professionals, but is quite popular with many individual investors.  According to this school, penny stocks are the best to buy since they incur great percentage changes when compared to normal stocks.  When a $75 stock moves up by $.50, that’s a small change.  When a $2 stock moves up by the same amount, that is a much bigger gain.  However, stocks can move down as well, and predicting the direction of penny stocks isn’t as easy as some gurus would make it sound.  Still, people do make money investing with this style.

This is just a basic overview of how many people determine the best stocks to purchase.  There is no one right answer, so be sure to keep learning everything you can.  After all, your hard earned cash shouldn’t be put just anywhere.  Form a solid investment plan, stick with it, and reap the results.

Now here is a can of worms.  You have some money, where should you be keeping it?  How can you preserve and grow your money without putting it in excessively risky investments?  The key to finding the best way to invest your money is to understand three things: your goals, your time horizon, and your tolerance for risk.

Now, that might seem a little simple, but why complicate things?  By understanding where you stand on these three factors, you can find the best way to invest for your specific needs.

Goals and Time Horizon

photo credit: julianlimjl

I put these together since they are very closely connected.  Why are you investing?  Do you want to retire early, save money for college, or are you simply tired of letting your money sit around in your savings account earning next to nothing?  Whatever the case might be, each goal requires a different investment style.

Think about it this way.  If you’re saving for a short term goal, what are you hoping will happen?  Basically, you’re hoping that your money will grow, and that you will able to meet your goal better.  What you certainly *do not* want to happen is for any of your money to be lost.  This tells us that for short term and critical financial goals, choosing low risk investments is the way to go.  Saving up your house down payment is a shorter term goal.  Imagine if you had all your down payment money was in stocks, and the market was down when you wanted to buy.  Your investing didn’t help you at all, only hindered you.  Of course, stocks could also be up during this same time, but why risk it?  Use safer, more stable investment vehicles when saving up for short term goals.
If you’re saving up for retirement when you’re young, being more aggressive is OK.  Say the market is down for 5 years.  So what?  You’re not taking the money out until you’re 65, so why worry about where it is now?  Buying and selling only adds to your transactional costs while investing for retirement.  Unless you have flawless market timing skills (which nobody does), you will want to buy and hold slightly riskier investments for retirement to maximize your returns.

Risk Tolerance

Another issue to consider is your tolerance for risk.  Since you want to be buying and holding your positions, you will need to know how much you can tolerate losing without bailing out on your investments.  One common test is called the sleep test.  Basically, the sleep test is asking yourself if you could sleep at night if your portfolio lost a certain amount of value.  If the answer is yes, your risk level is appropriate.  If not, you will want to make your portfolio is a bit safer.  Lower returns due to cautious investing are better than even lower returns due to bailing from the market.  Besides, anything that causes you to lose sleep probably isn’t worth it.

Conclusions

So, I hope this has helped you find the best approach to investing for your needs.  You will want to research and get a good idea what your goals and risk tolerances are before you start putting cash into the market.  Here, as with most things, a little planning can go a long way.

Penny stock trading is a popular form of trying to make money with stocks.  Since penny stocks are priced very low, small movement in their prices can lead to great changes in the total value of a position.  For this reason, they are popular with day traders, since volatility is needed to make a good short term profit.

As with any sort of intra-day trading, it is very important to keep costs low.  If you are entering and exiting multiple positions in a short amount of time, it is crucial that you spend no more than necessary on commissions, as you will be shocked at how fast these can all add up.  Keep more of your money to yourself, and select a penny stock broker with the lowest commissions possible.

Another potential issue when it comes to fees is that many brokers will charge a premium for trading stocks under a certain cost per share, or at a certain volume.  Since penny stock trading consists of buying a high volume of very cheap stocks, this can form a problem.  Be sure to find a broker that does not charge a premium for trading penny stocks if at all possible.  You may have to read the fine print to figure this out, but it’s worth it in the long run.  Those small fees will eat into your earnings over time.

photo credit: ♦ Kris ♦

Once you have the fees sorted out, it’s time to consider some other factors.  As with any sort of day trading, speed of execution is critical.  You want your orders to be carried out as soon as possible after you place them.  The best way of figuring out the responsiveness of a given broker is by reading reviews online about how well they execute your orders.  Most of them will advertise good times, but there are no guarantees.  This is one area where doing your homework will pay off well.  You don’t want to be stuck holding a bad position longer than you want to because the broker didn’t execute your order quickly.

So, this covers the very basics of choosing a penny stock broker.  There are other features that help differentiate different brokers, but the ones listed above are by far the most critical.  If you’re going to be trading penny stocks, you can’t afford to ignore these issues and let costs eat up your earnings.  Play it safe, do your homework, and find the right brokerage for you.