Introduction

Before considering investments, the basic financial bases should be covered. One
should have money in a savings bank for emergencies, contributing to a retirement fund,
enough insurance, equity in a home, and most importantly, paid off as much debt
outstanding on any credit card. After these issues are taken care of, any surplus should be
used in investments to protect from inflation. If investments are managed correctly, it is
most likely that a person will make out nicely and avoid the risk of heavy loss of hard
earned money.
Although monies used towards investments are extra capital on top of the
necessities, it is wise to still have a plan or a goal in mind when putting together a
portfolio. his will help to stay focused and identify the tolerance for risk. here are
different ways and vehicles to invest and each one comes with their own risk!reward
factors. A goal would help to allocate the capital in different areas to meet a person"s
goal. It does not take much to start investing# $%&& to $'&&& would do. $%&&& would be
better but one could start with a mere $'&&. he point is not the amount of money that is
invested# it is the strategy that counts the most.
his paper will explore three different investment vehicles( stocks, bonds, and
mutual funds. It will look at the benefits and risk of these types of investments and which
to use to reach goals that are set.
)tocks
*hen someone invests in stocks, they are investing in a company.
+ompanies split up their company into small pieces that are represented by stocks. hey
do this in order to raise money to expand their businesses. *hen a person buys a stock,
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they buy part of a company and raises revenue to help the business expand. An investor
in stocks relies on two ways of making a profit# through capital gains and dividend
payouts. As a company expands and becomes more profitable, the desire to own a part of
the company becomes greater thus drives up the market price of each share of the market
price. Of course this principle works in the opposite direction, driving the price of each
share downwards.
he simplest way to understand how investing in stocks work is to imagine
buying a product in the present that is pro8ected to be worth more in the future. 9owever,
since no one can predict the future the success of a company is not always a sure deal.
his introduces the risks that are involved when investing in stocks. here is not 8ust one
indicator of how well or poorly a company"s stocks perform but various elements that
must be considered.
One element that may be an overlooked risk is that no matter how well a person
does research on a company or the general market, some stock prices act irrational to the
correct price value of what a share is actually worth. 6or a long time a stock could sit
totally undervalued or it could be totally overvalued for no apparent reason. .etermining
the appropriate worth of a stock and buying it at a cheaper price adds a cushion of safety
but it does not always work that way.
here are irrational risks that are involved but historically the stock market has
proven to provide decent returns over the long run. he best thing to do is build and stick
to a strategy, do homework, minimi:e preventable risks, and tough out the rough times.
here are many ways to pick a stock. )ome would say that a blindfolded monkey
throwing at a dartboard would outperform many investors. his should not discourage a
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person who is well prepared to shy away from making good informed investments. 3any
rely on focusing on the fundamentals of a company and others study charts and trends.
Both strategies work for some people or else why would they continue to rely on them<
echnical analysis may be a good strategy to employ as a starting point to 8ump in after
the fundamentals of a company is found to be solid.
Once a goal is in mind and research has been done on a company stocks are ready
to be bought. here are also various ways to buy stocks. A popular, and cheapest way is
through discount brokers. he benefits of discount brokers are the low fees and the
involvement of managing one"s own money. If research is done well, investors do not
need to hear the latest fads that full service brokers provide at high premiums. Besides the
tips, most times the market is so up to date that the price of the stock may already reflect
the =news> that is not so new. here are a number of discount brokers online like(
Ameritrade, 2trade, 6idelity, +harles )chwab, and ?ecco. )ome of these brokers provide
their own research team that screen out stocks that might be appealing to an investor
through personali:ed criteria.
A real benefit from owning stocks is the unlimited potential to make profit. Other
investment vehicles provide smaller gains and is, at most times, limited to the interest
rates agreed upon during the purchasing period. If planned well, the stock market will out
beat most other investment vehicle in the long run. It is also easy to trade and personali:e.
he downside of owning stocks is the high risks that are involved. he risks, however, is
limited to the amount of money that a person is willing to put up. )tocks also have a way
of tugging at a person"s emotions. hey always fluctuate in prices that sometimes cause
investors to reconsider if they made a wrong investment. If one is fainthearted,
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substantial losses could occur if a drop in price sets one in panic and causes irrational
actions.
Bonds
A good way to lower overall risks is to add bonds to one"s portfolio. ,nlike
stocks, investors do not own a part of a company but is only loaning money to a bond
issuer with a promise to pay back the loan at a set interest rate. ,sually bonds pay interest
every six months. he two payout dates determine the annual rate.
here are two ways that bonds make money. One is based on the gains of the
interest and the other is on the capital gains of the bond itself. As stated before bonds will
continue to pay interest until the maturity date. his method could be appealing of a bond
was purchased when interest rates are higher. -ike stock market fluctuation, interest rates
also fluctuate causing the value of bonds to fluctuate as well, however, one should
already know the risks that are involved and there are no real surprises. A good way to
further minimi:e risks when looking to purchase bonds is to check the credit worthiness
of the borrower. All ma8or bonds are placed on a rating scale of A, B, or +. he ratings go
up to AAA and bonds that are graded +s are pure speculations. Any bond that is rated a B
or above should be a decent investment, but it is best to stick to bonds that are A rated.
he only real surprise would be if the issuer cannot pay back a bond for some reason or
another.
he way bonds make capital gains is if the bondholder is able to sell them on the
market. he principle is that is interest rates go down, bond prices go up and vice versa. A
potential buyer might want to lock in a higher interest rate that is offered by a bond
during a time when interest rates are lower on the outside. *hen interest rates are high,
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bond prices are lower because it is easier to get a competitive quote. he federal
government controls the interest rates and they attempt to balance the rate of inflation by
manipulating the rates. *ith this in mind, everyone should know that there are good and
bad times to buy stocks and bonds. he key is to know when would be a good time to buy
in either field.
3utual 6unds
Another alternative to investing in stocks or bonds is mutual funds. A mutual fund
is run by a financial organi:ation that receives money from its shareholders and creates a
diverse portfolio of investments. An investor is able to buy into that portfolio and gain or
lose on its profits.
here are many types of mutual funds with different ob8ectives. he financial
company does almost the same thing when they set up their portfolio as a personal
investor. hey have a goal and strategy in mind and they diversify their holdings. Buying
a mutual funds could have as much risk as an individual picking stocks themselves. he
benefit is that mutual funds save the work. On the other hand, investors pay for the
service that could have been done themselves.
3utual funds usually have a fee when you buy shares or they charge a fee when
sold. hese are called load funds. hese fees are in place so that the financial company
will make more money and also to prevent people from buying in and out of a particular
mutual fund. On top of the load fees, they also charge for portfolio management fees
which usually run from &.%A to ;A or @A of assets under management.
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5eferences
0itman, -., Coehnk, 3., D Billingsley, 5. E7&&FG. 4ersonal 6inancial 4lanning.
Helly, C. E7&&@G. he neatest -ittle 0uide to )tock 3arket Investing.
obias, A. E7&&%G. he Only Investment 0uide Iou"ll 2ver /eed.