When investing money in the stock market, you should always have a strategy in mind. Having a specific strategy will help you make smart, timely decisions and avoid losses.
What Is an Investing Style and Why do I need one?
Finding the right companies to include in your portfolio is not a very easy task. There are over 2000 companies on the NYSE and over 3000 on the NASDAQ. This means an investing style is crucial.
Factors that affect your investing style:
- Tolerance for risk
- Your investing timeline
- How much time you have each day to worry about your portfolio
How much Should I Invest?
There are no hard rules to determine how much you should invest in stocks?
- Never invest what you truly can not afford to lose!
- Find the risk-reward balance – base this on your investment timeline. If you have 20+ years to invest, you can put up to 80% of your money into stocks. As you get older, more of your money should be in cash, bonds, gold.
- Do what feels right – at the end of the day it all about your comfort level which requires serious thought and consideration based on your own financial situation.
What Are Large Cap Stocks, Medium Cap Stocks and Small Cap Stocks
- Companies with less than 1 Billion in market capitalization are “Small Caps”
- Companies with between 1 Billion and 10 Billion in market capitalization are “Medium Caps”
- Companies with over 10 Billion in market capitalization are “Large Caps” or “Blue Chips”
These different sized companies offer different prospects. Small caps may have fewer products. The risk of a Small Cap going bankrupt is higher than a blue chip. Small Caps, if they can become successful can achieve an astonishing growth rate!
Mid Caps provide a great track record for ability to generate profits, but have greater potential for growth.
It is important to realize there is no reason to pick extreme ends of the scale.
What are Value, Growth and Income Stocks?
What Is Value Investing
Looking for stocks with prices that have lower prices compared to their intristic value. Value investors look for stocks that are valued lower than what it should be. Value investors do not try to guess earnings. Value investors try determine a fair stock price by looking at the company’s earnings.
What Is Growth Investing
Growth investors focus less on earnings, but look at the earnings momentum and the products a company offers. They look toward the future. Growth stocks will generally have hither P/E ratios. Most growth stocks are small and mid cap stocks.
What Is Income Investing
Income stocks are stocks and companies that give out a large share of their profits as dividends. Income stocks are typically large, established companies. The company declares a dividend per share. Say the dividend is $1/share. When the company pays dividends, you would receive $1 for each share you own.