Investment Basics

Financial planners generally recommend long term strategies for stock purchases - (i.e. funds placed in the stock market should be looked at as not needed for seven to 10 years). Here are some investment strategies for the stock market:

Buy and Hold - The strategy most recommended. Similar to a long term savings account. The idea is to find a company you are comfortable with, and buy it for the long term. People following this strategy are usually not too concerned with the daily, and monthly ups and downs of the stock, as they plan to hold it for years. (Look at a five year graph, and a major drop in stock price looks like a small bump). Of course the investor is not married to the stock either, so if something about the financial condition of the company changes, it may be time to sell. Many investors try to beat the index funds and will be happy with an average return of 12 to 20% per year.

Day Trading - Risky, but has the potential for greater gain. Also, there are tax consequences of selling before 12 months. Still better than casino gambling, at least there is much more chance of making money, and less chance of loosing everything ;-). The biggest mistake most beginning investors make is trading too frequently.

Dollar cost averaging - The method of purchasing an investment (Stock, Mutual Fund, 401K, etc.) on a regular basis, regardless of the price. For example, suppose you decide to buy a stock with average price in the past year of $20. Rather than trying to time the market in an attempt to buy at the lowest price, the strategy is to purchase a fixed dollar amount, say $100 every month. So one month it may be at $19.75 which gives you 5.06 shares, the next month it might be $21, which would be 4.76 shares for a total of 9.82 shares. The idea is to continue accumulating shares. If the stock selected was a good company at $25, then it still good, and even a bargain at $19. If it goes up to $30, then you can buy less shares, but hopefully your homework revealed that you expect further growth for the company. With this example you would have invested $200 for 9.82 shares

Company Amount Price Shares Total Shares
XYZ Co. $100 $19.75 5.06 ... 5.06
XYZ Co. $100 $21.00 4.76 ... 9.82

At the current price you now have 9.82 shares, worth $206.22 from the $200 invested. The price continues to fluctuate, and you continue accumulating shares at market rates.

The Real Risk - Not Investing
Note that, while investing in the stock market incurs some degree of risk of loss of capital, it should be weighed against the risk of not investing at all, and letting inflation take over.

Get Started
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