Although it seems cliché, understanding your objectives is a crucial first step to investing. There are some who buy a stock in the morning and sell it by evening (day trading.) Others, swear by month or year long bonds. Personally, I'm not looking to have to keep watching over my stock choices, and to play a volatile game. What suits me are mutual funds, because of my objective. Before you even start thinking about the stock options you want to buy into though, let's analyze the different objectives.
Although I mentioned day trading in the first paragraph, I would not recommend it. Day trading is typically taken up by professionals. If your option is to trade safely, with little to no risk, your best bet are government/municipal bonds. Even the riskier bonds, like corporate bonds, don't compare to some of the most volatile stocks. Stocks are most volatile, and some are riskier than others. If your objective is to "go big or go home" stocks are the way to go. Something that will be covered later, are the different types of stocks, like "blue chip" stocks and others.
One thing I want to focus on are mutual funds, which are interesting. Mutual funds are a collection of stocks, run by a manager, so technically, all you have to do is buy them. Well, not really. You should always monitor all your investments, obviously. Some mutual funds just don't perform as well as others. It's logical why mutual funds are less risky. Say, perhaps, a revolutionary new smartphone that pairs with a revolutionary new e-commerce site emerges, so you buy into this sector of technology. That's great, those two companies stocks are bounds to go up, and drive the technology sector up. But then, there could be a selloff, and the technology sector will crumble. If you put all your money into this sector, chances are you'll lose a lot of it with this selloff.
Now, remember a mutual funds is a "compilation" of stocks. Some stocks from the technology sector. Some from the bank sector, some from this sector, some from that sector. If the technology sector tumbles, your manager should get rid of it from the mutual fund. Sure, your fund will drop, but not as much as the individual tech stocks, because if the other sectors are going up, it will "balance out."*
Obviously, once you get into investing more, many more things will come up, that will be too lengthy to write in a single article. To learn more about investing basics, volatility, worldwide markets, and more, check back at BizRoca for more "Back to Basics" articles.
Summary: Always choose your investing objective before investing. Those who wish to play a riskier game that can lead to higher rewards should consider individual stocks, while those who want a less risky game with less rewards should consider bonds, the safest being government bonds. Mutual funds provide a great in-between, for all types of investors.
*Keep in mind, if a sector drops enough, it can lead to the entire market tumbling. It is nearly impossible to predict if this may be the case, so research is always important.
*BizRoca is not giving financial recommendations. These are our opinions. For serious financial recommendations, consult a financial expert.
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