How do Beginners Choose their Investments?
Stock investment/trading confers upon the investor the opportunity to reap dividends and earn by way of capital appreciation. The preferred stock investing strategy, viz. capital preservation or capital appreciation, will determine the kind of (shares) investment that should be pursued by someone who intends to play the market. Investing in companies that are in the mature growth phase of the business cycle, and have been undervalued by the stock market, will result in the investor earning dividend income in addition to capital gains. In case of dividend-yielding stocks, the intrinsic value of a share is assessed using the Dividend Discount Model (DDM) while the return on investment (ROI) can be calculated using the following formula:
Return on Investment = (D1+P1- P0) / P0
D1 = Dividend Received
P1 = Selling Price
P0 = Purchase Price
Technical analysis may prove handy for those who are adept at reading graphs and charts, and looking for patterns and replications. Fundamental analysis, on the other hand, is useful for people who are comfortable with analyzing financial statements (10-Ks and the 10-Qs) in order to determine market timing. This is because investors relying on fundamental analysis believe that the price of a security may be mispriced in the short run, but will eventually correct itself over a period of time. Investors, who are solely interested in capital appreciation, should opt for growth stocks since value investing will not yield the desired results.
Mutual Funds Investment
Mutual funds are good investments for people who would prefer relying on the expertise of a fund manager. The latter raises money by issuing shares whose net asset value (NAV) is the difference between the fund’s assets and it’s liabilities. Price per share and NAV are equal if one invests in funds that do not have a front load. The money that is raised is invested in stocks, bonds, and other securities in accordance with the fund’s mandate, viz. capital preservation and/or capital appreciation. Interest from bonds and dividends from stocks, that are either distributed to the shareholder in the form of cash or additional shares, and capital gains from the investment fund are contingent on the ability of the manager to pick out appropriate investments.
Investing in treasury bonds that are issued by the US government provides the bondholder the opportunity of receiving regular interest income. The government issues treasury bills, notes, and bonds; I Savings Bonds and EE/E Savings Bonds. Treasury Inflation-Protected Securities (TIPS) provides a hedge against inflation, so that the expected and the accrued ROI are the same. The aforementioned fixed income securities are exempt from state and municipal taxes but are federally taxed. In addition to these securities, municipal bonds, viz. General Obligation Bonds (GO) and Revenue Bonds are also worthwhile investments. It would behoove the investor to note that treasury bills are sold at discount to par, and the return to the bondholder is the appreciation in the value of the bill.
Investing in commodities in addition to investing in stocks and bonds is an excellent way of diversifying one’s portfolio, since the relationship between commodity price index and the price of bonds and stocks is generally inverse. In addition to commodities, options trading is also very profitable for experienced traders. However, these investments entail a great deal of risk and may not be suitable for a novice.
Hopefully, the above article would have provided useful investment advice for beginners. People who are uncomfortable with the aforementioned investments can try their hand at passive income opportunities, since leveraged and residual passive income opportunities are a dime a dozen.