There are a few things you have to learn before you become a stock market investor. First is the idea of buying low and selling high. But even though that phrase is quite simple to say and memorize, it is not that easy to put into practice. One of the questions that you would probably ask is, how do you identify which stocks could be bought low and sold high? Moreover, when is the right time to do it? These are some of the questions that, until now, cannot be answered, and that is what makes the stock market exciting and thrilling, and to be able to conquer its mystery while earning money is the true treasure.
A good stock market investor understands that it takes some time and patience before you start getting substantial profit from the stock market. By now, you might have already understood how great the risk involved in investing in the stock market is, but look at this on the bright side – the more risk involved, the higher the return of your investment.
Any educated stock market investor knows that it pays to have good knowledge on anything and everything about the stock market. He or she also knows that it is but natural that the stock market hits bulls and bears, but the idea is to stay on top of the ups and downs of the stock market.
Keep this in mind: if you want high returns, you should be ready to face high losses. It is also important to give some time to study the trend of the stock market where you would like to be an investor in. You also have to identify whether you are going to invest in a company that can provide high returns or in a company that can provide regular modest dividends. With these things in mind, you will already realize how being cautious and meticulous in investing pays off eventually.
One bit of conventional investing wisdom is that stock mutual funds have much more risk than bond funds. In this article we take a look at how stocks and bonds will have differing risks. We will also look at how much we should invest in stock funds vs bond funds. Stock represent a partial ownership in a business. But bonds are set up more like a loan to that business. Upon examining a typical bond issue, if you ignore the risk that the issuing company might go bankrupt at some point, you find that you know precisely how much money you will receive back and when you will receive it. Take this case as an example, if you bought a bond with a 6% yield on that bond, it will probably be paid as a 3% dividend every twice a year. If you hold that bond issue to its final maturity, you will receive the face value of the bond back, say $10000. The key thing to note is that you would have to hold it 20 or 30 years to receive all your money back.
There is one other risk that many investors are unaware of. It comes into play with a “callable” bond. In this case, the company issuing the bond has the right to redeem, or call, that bond before its final maturity. A company may want to call a bond if interest rates had fallen, so they could then reissue the bond at the lower market interest rate. With that as background, we can see that stocks are riskier than bonds because bonds will have a fairly certain cash flow for the bondholder, while the company’s common stock will have anything but a certain cash flow. But the other side of that coin is that a stock has the potential to appreciate greatly in value. For example, if a stock were to appreciate 10% a year, in 30 years it will be worth more than 8 times its original value.
One key thing to note about bonds in individual portfolios. Most people don’t hold individual bonds in their investment portfolio. They are more likely to have bond mutual funds. This is often the case in retirement portfolios like IRAs and 401ks. But bond funds behave quite a bit differently than individual bonds, since they don’t have a final maturity. The difference is so great that the conventional wisdom that stocks are riskier than bonds may no longer be true.