Investability: Buying Stocks and Other Investment Strategies for Your Personal Risk Tolerance

Stocks Bonds, ETF’s and Mutual Funds and FDIC insured Accounts

Choosing the right type of Investment for Yourself

In tough economic times it is difficult to know the best way to invest money, and you need to question if should  buy stocks in this economy.  Stocks have historically shown that they outperform all other kinds of investments over longer time periods.  Those who buy stocks are a looking to build long term financial growth.

For the beginner, when you buy stocks, you are investing in a corporation.  The purchase of stock gives you ownership in the company.  As a stockholder, you can earn a dividend from the company’s profits. Stocks can yield greater returns, but they also carry a greater risk than investing in bonds, mutual funds or in bank cd’s.  Stock prices fluctuate rapidly, as can be seen in the stock market daily trading. Choosing which stocks to buy,  takes some educating on your part. You want to know the stability of the company, the industry and economic picture overall, who runs the company, and look at projected numbers for earnings, etc.

If you are a real risk taker, you may want to buy stock on margin, which means you are buying more stock with the same money you have, and borrowing money from the financial institution that is selling you the stock.  There are considerable risks for buying stocks on margin.  If the stock goes up, you will benefit greatly.  But if the stock goes down, you owe the money for the difference.  Margin borrowing is not suitable for everyone.

Bonds can give you a steady stream of income and help balance out your investment portfolio. They are a much different investment instrument than buying stocks. Bonds will give you a set (fixed) reliable income through periodic fixed interest rates. Bonds are issued by governments, corporations, and muncipalities to raise funds.When the interest rates drop, older bond values rise because the amount of fixed interest rates look more appealing to an investor than the  rates for new bonds, which would be lower. When interest rates go up, the existing bonds lose value.  Inflation is a consideration with longer maturing bonds. The economy can also affect the corporate bonds to fluctuate.  If there is a change in the economy that causes a company to reduce its ability to pay the interest or principal, the bond prices may go down.

Mutual funds allow an investor to diversify and lower their investment risk.  When you buy mutual funds, you own a portion of the fund’s portfolio.The mutual fund portfolio contains a variety of investments.  The mutual funds will go up or down based on the value of these investments.  The majority of mutual funds divesify their portfolio with a mixture of bonds, stocks, and cash products.  Or they may invest in only one type of these investments.  When ;you buy mutual funds you can choose from a variety of mutual funds that specialize in a particular industry, or invest in foreign or domestic funds. A mutual  fund is constantly buying and selling its investments and distributes the gains from stock dividends and interest to its shareholders. The investor who buys mutual funds can also receive capital gains from the sale of these  funds.  A prospectus is filled with information from the mutual fund, about the mutual fund. It explains how the mutual fund invests, and the details of purchasing and dministration and costs related to the fund.  An important aspect before you buy mutual funds is knowing what it costs to be invested.

ETFs are mutual funds that behave like stocks.  ETF stands for exchange traded funds and reflect what is happening in the particular index it is invested in.  ETFs can trade throughout the day. Mutual funds can only trade once or twice a day, can be purchased on margin and you can sell them short. ETFs trade with the flexibility of stocks, but pool your money like a mutual fund for equity purposes within a particular index.  ETFs have gained in popularity over the years because of the versatility it offers.  Some of the more popular exchange traded funds that follow indices are known as Spiders, Diamonds, and Cubes.  

• SPDRs (SPY) tracks Standard & Poor’s (S&P) 500 index. The first ETF was started in 1993 using this index.  Vanguard 500 Index is an example of an ETF. Spider ETF’s offer a lot of diversification and are a lower risk investment.

1. Diamonds (DIA) track the stocks in the Dow Jones Industrial Average (DJIA), which covers the 30 biggest and widely held companies in the U.S. These are known as blue chip stocks traded on the New York Stock Exchange (NYSE). Companies such as Coca Cola, Walmart, Disney, Intel.  

• Cubes track the Nasdaq QQQQ 100 index. These represent the biggest non financial corporations traded on the Nasdaq stock market.  Such companies include Google, Apple Computer, Expedia, Costco. the majority of  Cube ETFs are invested in the technology sector.

• There are a variety of other ETFs that invest in sectors that are specific to particular industries, countries, and other sectors.  These ETFs may be riskier due to their specific sectors.

A safe way, no risk way to earn interest on your money with FDIC insured accounts.  These pose no risk to your money and are backed by the government up to a certain amount if the institution you are invested in goes under.  These type of accounts come in a variety of choices from passbook savings, online savings, reward checking, and CDs. These accounts pay lower interest rates. Reward checking very often requires a minimum initial deposit and a requirement to maintain a certain balance. CDs offer a higher rate of return, but require a longer term investment.