Thursday, May 1, 2014

More about stock investment

When you invest in stock, you are buying shares of ownership of a company, and that’s where growth comes in: You now own a part of something that is alive and growing. In all the many investments available, stocks provide the best chance for growth over time. They are a great solution for long-term investing. In the U.S., stocks have outperformed all other kinds of investments, including bonds, CDs, and government securities. If you are a shareholder, your share of wealth will grow as the company grows. The main reason to buy stock is for growth, a hedge against inflation.

For a five-to-ten-year period, the chances are that it will grow. Reinvesting your dividends, instead of using them as income, is a way to systematically increase your investment. Always a good rule of thumb is to pick stocks that will grow over the long term, and by this we mean about five to ten years, at the very least. Investing in stocks is no guarantee that you will exit the market with more money than you entered. Knowing the risk involved and weighing it against the potential gain or loss is extremely important.

        Investing in the stock market provides for the expectation of a higher return when compared against what one can get from fixed-income assets like bank deposits and government treasury bills. Common stock is an attractive investment alternative because it provides an income potential not only through capital gains but also through dividends and stock rights. Moreover, it does not only provide a strong possibility for a higher return on investment but offer flexibility in holding period as well. This means that should the investor need funds, the stocks may be sold anytime. Also, although there is the risk of having losses, as when the price of the stock goes down, these will not be losses until the investor decides to sell at a loss. Thus, the stock market is also a test of holding power. Various studies worldwide have shown that the risk of losing money in the stock market decreases the longer you keep it there.

        While the price of the stock itself may appreciate gradually or remain flat, shareholders still receive a regular cash payment in the form of dividends that can add up to a substantial amount over time. The benefit generated from dividends is derived from studying the dividend yield. The dividend yield is found by dividing the expected dividend by the market price of a stock. The resulting yield is compared with current interest rates. If the dividend yield is higher than what is earned from current interest rates, and if the price of the stock is expected to at least remain steady after the required holding period, the stock may be a candidate for a buy. 

        In general, the stock market is something you can learn enough about to make safe and wise investment decisions. You will need to be patient, you will need to know how to gather information, and you will need to know yourself pretty well so that you do not buy or sell on impulse. Why does the value of a stock go up and down? Simply, it is because of law of supply and demand. Demand for a particular stock by investors pushes the price of the stock upward. If there is less demand, the stock’s price will go down. Demand is usually based on investors’ reaction the company’s future prospects, i.e., a fabulous product or company earnings. If the company’s earnings are better than anticipated or a company has a new product that the public loves, demand for a stock will go up and so will the stock’s price.

        Predicting highs and lows in a fluctuating market can be extremely difficult; however there is a solution to the problem. The answer is Peso Cost Averaging – which results from spending a set of amount on shares or units each month. Putting regular savings into a fund with equity content not only provides the discipline that some people need to save, it also offers the advantage of Peso Cost Averaging, a buying technique designed to overcome the uncertainty of volatile markets.

        All investors would like to buy at lows and sell at highs, but this is a talent that eludes even the most experienced brokers, especially when the markets are fluctuating. It is essential to note that Peso Cost Averaging is only really beneficial when you are buying into a fundamentally sound market. When you commit a regular sum of money each month, you automatically buy fewer units when the price is high, but more units when the price is low. In this way, over a period of time, you will always do better than the average price, simply because you will get more units for your money at the below average price. For example, you buy P10,000 worth of shares  each month. If share prices halve, you will buy twice as many shares with your P10,000. Equally, if the share price doubles you will get only half as many; but theoretically, you will not blame the investment manager since an overall profit is made.

        To be successful in the stock market, you must pick the “right” stock. Studies over the last fifty years have shown without exception that randomly picking five issues will yield just as high a success rate as any form of technical or fundamental analysis, if the trader employs proper money management. A trader must not only buy stock, but must know when to sell and take a profit, or sell and take a loss. The purpose of investing is to make money. If a 25% return on investment (ROI) in one or two months is good based on the past performance of the stock, then take profits when this is achieved. If your stock has a profit, watch the volume carefully. When you see smaller volumes, even if the price is going up, get out. This shows isolated buying interest or could mean there are just few people playing the stock. Large volume with small upward movement is better than small volume with a large move. Large increase in volume to the downside is very bad.

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