The financial markets provide the best location for purchase or sale of financial “instruments”. These markets also guarantee liquidity, establish asset prices, and reduce the expenses occurred while operating in the financial markets. For the beginner investing in these financial instruments, it’s always good to bring the markets down to their basics. The markets can be realistically divided into two separate entities; the market of promissory notes and the stock market.
For the sake of this investment newsletter, we will focus on the stock market. As mentioned before, funds are typically invested into a company, and the investor becomes a part-owner. The amount of influence, if any, which the investor possesses in making decisions within the company, depends on the percentage of shares that are possessed. Depending on the company and its size and standing relative to the rest of the market, investment options are divided into several basic categories: blue chip stocks, growth stocks, income stocks, and defensive stocks.
Blue Chip Stocks are shares of large companies having a stock price history of profit growth, annual return in excess of $4 billion, significant capitalization efforts and a stable record of paying off dividends. Such indicators are perfect “how-to invest in stocks” lessons for beginners. Such giants of the stock market are McDonald’s, Intel, and Nokia, to name a few.
Growth Stocks are shares of a company that tend to grow faster; the management team typically pursues the policy of reinvestment of revenue into further R&D and capitalization of the company’s assets. These companies rarely pay dividends and, if they do, the dividends are minimal as compared with other companies in the stock market community.
Income Stocks belong to companies with high and stable earnings that pay handsome dividends to the shareholders. Shares of such companies are a staple of mutual funds and a cornerstone for retirement plans of middle-aged and elderly people. Companies on the stock market with income stocks are Citigroup, BP Oil, and Progress Energy.
Defensive Stocks tend to remain stable under difficult economic conditions. They include companies in the food, tobacco, oil, and utilities industries. Commodities trading in these financial instruments frequently does well in difficult times because the commodities that they provide tend to be in demand in spite of economic downturns or stock market crashes. Defensive stocks are not leaders of the stock market during economic expansion because they do not experience the dramatic upswing in demand of other companies.
When investing in the stock market, it is important to examine companies carefully for income statements, balance, cash flow, and other factors. Once secure with a company’s stability, it is less likely that investing mistakes will be made, knowing that each company in a portfolio contributes to, or reduces, the bottom line.
New to Trading, or simply looking to increase your profits? Read Stephen Bigalow’s Daily market comments to know where the stock market is heading!
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