I was like everyone else in this recession who wanted to hunker down and conserve resources; the urge to hoard my money was over-powering. Yet, every good business owner knows that it takes money to grow money. Then, I thought: “If I haven’t the funds to invest in my own future success, it’s doubtful I’ll convince anyone else to do so either.” That’s when I made a commitment to invest in myself and my business. If you want to use that growth to get an edge on the competition, then hoarding is not the answer. Now is the perfect time to learn where to invest your funds in order to maximize small business opportunities for growth, as we anticipate an economic recovery by 2010.

Understand How To Invest For Business Growth

Your money should be planted like a seed in the Spring, and you should expect a harvest when it matures. That’s why the investments that you want to look at for your business should offer the promise of significant returns, if not immediately, at least within a reasonable time period. Some investments, I learned, can produce a return immediately; for instance, updating infrastructure is one investment that can pay itself back fairly quickly.

As a work-at-home business owner, I’ve realized that I could take government incentives that provide energy rebates on my home’s infrastructure and create future savings, releasing that money for my business. Many businesses are starting to see the wisdom of adding a thin film solar roof to an establishment, of updating their furnaces or other energy systems to offset rising energy costs, and of keeping infrastructure costs low. While some of those returns are immediate, the final recouping of costs may take years. Other types of investments take longer to mature, but it’s still worth investigating.

Do You Have A Business? Basic Areas To Invest In

Capital investments: Whether it’s buying real estate at a depressed price, adding new equipment, or updating technologies, it’s a bargain buyer’s dream out there right now. The nice thing is that you might even be able to get a small business loan to cover some capital costs, using the Small Business Administration loan program. Some of these investments can later be declared as assets.

Education: It will take longer to recoup this investment, but it can lead to more opportunities in the future. Pick a degree or certification that holds lots of promise of providing a payback. If you don’t have the time, think about finding people to hire who already have completed the coursework that is beneficial to your company.

Staffing: It’s also a buyer’s market for hiring talent. By 2010, the job market may look different, so now is the time to recruit and hire talented people at a fraction of the cost. You can identify quality talent by using freelance or contract workers, keeping your human resources costs low. When an upswing develops, you’ll be in a good position to hire full-time employees (from your pool of working contractors) who have already proven themselves.

 
This guest post is brought to you by Business Loan Option.

How To Invest For Business Growth is a post from: Investing Toolkit

What’s ahead for crude oil traders? How do things bode for our economy? Here are some speculations.

The following INO.com video discusses the behavior of the crude oil market over the past year. There’s been a lot of volatility over the past 12 months, but if you’re a trader, you’re probably more interested in what INO.com’s resident expert, Adam Hewison, has to say about the trends.

Check this link or the image below to watch the video:

According to Adam, the charts for crude oil are pointing to an uptrend, which are in conflict with the seasonal behavior of crude oil prices. At this time of the year, the typical price movement is downward, but prices right now look like they will buck this trend.

So if there is seasonality to crude oil price movements but the market wants to do the opposite, then this is something we should be paying attention to. The market has been hovering around $75 a barrel but appears to want to break through that. In the video, Adam analyzes the crude oil chart using INO.com’s MarketClub tool. He then uses the Fibonacci retracement feature to analyze the chart details further. He also applies the “Trade Triangle” indicators against the chart to come up with some conclusions:

There is a potential here for crude oil price increases during the winter season. This would be bad news for the U.S. and the world economy if the upward trend does materialize, since this will mean that inflationary pressures may start to take over. And everyone knows just how inflation can cripple our economy.

Crude Oil Market Prices and Possible Inflation

What does this all mean in the larger scheme of things? I’ve been watching the economy lately, and this kind of information makes me even more worried that we’re headed for a double dip recession. First, unemployment numbers appear to be getting worse and second, we’re now seeing the risks of inflation as suggested by the crude oil market chart. Not to mention that economic fundamentals continue to be weighed down by credit crisis concerns, the consequences of the TARP bailout program, and the costs of the heavy stimulus plan that was developed under the Obama administration. We haven’t yet paid the piper so it looks like this economy still has lots of minefields to sidestep for some time.

In the meantime, if you’re a trader, then you know what the charts are saying: prices may go up against seasonality pressures, so it may be time to buy in to make a profit.

(Note: We provide only information and analysis, not actual advice about what you should be doing next. Please form your own conclusions based on the info you find here.)

Crude Oil Market Prices Point To Possible Inflation is a post from: Investing Toolkit

More reasons to build a diversified stock portfolio.

I read this article on Motley Fool that reminds us just how important it is to diversify our investment portfolios. A pure U.S. stock portfolio will make you pretty vulnerable right now. Why? Because of the threat of inflation. And if it’s not that, you can also worry about deflation, which can also be devastating to your investments.

Here’s why inflation is so tough on our domestic equities. With costs for doing business rising across the board, it begins to put a damper on companies and their performance. That’s one way of looking at it. Another way to look at it is this: the stock market rises when it faces a recessionary environment and falls in a stronger economy. This is because the stock market looks ahead: during a slow economy, the market expects the Fed to take on an “easy credit” approach and will expand the money supply. When inflation is around, the Fed will instead control interest rates and the money supply, by tightening.

On this note, there’s an economics professor named Charles R. Nelson who’s come up with this interesting trading rule that is based on the relationship of the consumer price index and inflation:

“When CPI inflation is on the rise, stay out of stocks; when CPI inflation is on the decline, buy stocks.”

Now we’re actually facing the possibility of higher inflation in the near term. With a huge deficit and stimulus programs, TARP bailouts and massive government spending left and right, the expectation here is that we’ll be visited by inflation. If so, what can we do to protect our investments?

Go Beyond U.S. Stocks To Hedge Against Inflation

Don’t be 100% invested in U.S. stocks if that’s the case. Go beyond our domestic stock market for some protection. Some ideas include investing some of your funds in iBonds, TIPs, commodities and foreign equities. You can also invest in foreign currency through a bank like EverBank, which offers foreign currency products (particularly certificates of deposit).

It’s always a good idea to be diversified anyway — and it’s obvious why. As investors, we’re always facing different conditions brought about by changes to various aspects of the economy. Our portfolio may be right for one set of conditions, but may be unable to weather other economic and financial scenarios. It is therefore imperative for us to keep up with the signals put forth by economic indicators and perhaps to do what is necessary to build an all-weather investment portfolio.

Go Beyond U.S. Stocks To Hedge Against Inflation is a post from: Investing Toolkit

We’ve explored day trading vs long term investing before. Let’s now take a closer look at stock market timing.

Market timing is a strategy that people use to determine when to stay or leave the market, or when to buy and sell their positions in a particular asset class. Active traders try to make money by predicting future moves in the market. Whether or not they’re successful at this depends on their skill, luck and experience.

So why do people day trade or perform market timing? Different investors and traders time the market for various reasons. For some, it’s because they believe that they can beat out average stock market returns, which typically range between 8% to 10% annually over the long term. For others, it’s because they want to protect their positions and reduce risks to their portfolio. And for many others, it’s all of the above!

I’ve seen all kinds of market timing over the years. While many people use online stock trading tools, trade on a daily basis and make high volume trades with small gains per trade, others use a different strategy and simply trade occasionally: their time between trades is long and they time the market as more of a long term strategy. If they sense the market shifting away from its long term trend, they may make a move to either buy or sell.

The Pros of Stock Market Timing

It is imperative to note that trading the market isn’t for everyone. Most investors should stick to their long term investing strategy of investing in diversified funds and ETFs. Better yet, they should invest in index funds or ETFs. For those of you who insist on trading and who’ve studied a particular investment market well, you may want to try out trading by using a “fake portfolio” first, or by investing only a little of your money before you jump in with both feet first into this high risk activity.

If you begin trading without a plan, you’re simply gambling money away. You can always approach trading cautiously and build up your experience over time in order to increase your chances of doing well in the markets.

What are some of the pros of market timing? The main thing here is that by learning some amount of technical analysis, you can engage in some stock market timing in order to make money regardless of the direction the market takes. By following market trends, you can anticipate (using the statistically favorable outcome) what kind of move to make next: this means that you can go long or short and still make money no matter what the market does. If you can do this well, you’re ahead of long term investors who only make money when the market goes up.

Also, if you’re a good trader, you can hedge your portfolio well and manage your risks using market timing methods.

The Cons of Stock Market Timing

Long term investors will tell you that timing the market is an awful idea: that there are only “cons” to performing this activity, and that trading simply amounts to gambling. But I believe that there’s a place in the investment universe for trading — you just have to fit this type of activity by having the right profile and experience of a true trader.

Given this context, I believe that there are some disadvantages to timing the market. One is that you’ll rack up a lot of tax documentation by trading up a storm. You’ll have to account for each transaction you make and it can be a pain to do this if you’re not properly equipped with the right tools. A corollary to this matter is that you’ll have to keep good records in order to know just how well you’re doing and how much you’ll owe the government come tax time.

Finally, I’d say that the main drawback of trading is really inherent in how it works: in order to make money, you’ll have to be right twice — once when you buy and once when you sell. You’ll have to know when the right time is to jump in the market, and when the right time is to jump out. If you aren’t in the stock market during its biggest days (when it makes the greatest gains), you’ll be losing out on big investment returns and your returns over time will greatly suffer. Making such a mistake would spell disaster for your track record as an investor.

A word of advice: if you’re bent on stock market timing and active trading, make sure you do so with your head and not with your emotions. Emotional trading will only ruin your bottom line. Trade as part of a well thought out strategy and not as an impulsive reaction to market movements.

Pros and Cons of Stock Market Timing is a post from: Investing Toolkit

So what would you rather invest in — mutual funds or individual stocks? I’ve tried both and from my experience, using mutual funds has been far more fruitful for me than individual stocks have been. Why? It boils down to a few reasons:

• I’m a lousy stock picker.
• I don’t have time to follow and track my investments actively.
• I can potentially become an emotional investor if I handle my investments too actively.

Knowing my limitations, I’ve decided to opt for my core portfolio to be in mutual funds, while dedicating only a small percentage of my investments to individual stocks and other alternative investments.

Why Invest In Mutual Funds Rather Than Individual Stocks?

When you’re new to the stock market, I believe that it’s best to start with mutual funds to get your feet wet and to make sure that you’re able to manage your risks well. You’ll have to shop around for a good mutual fund, request a prospectus from each company you look into and review each fund’s holdings.

The average investor will gravitate towards buying mutual funds because they want representation in the stock market while making sure that they are diversified as well. Equity mutual funds make for great and easy investments since their fund managers are responsible for choosing the baskets of stocks that comprise the funds. They take away the guesswork for you. All you have to do now is to review what’s in each fund and find those funds that are in line with your investment goals. For instance, are you interested in U.S. index funds, foreign equity funds, small company stock funds or bond funds?

If you instead decide to pick stocks, you’ll be responsible for screening for those that should fit your portfolio. You’ll have to make the decision on which stocks meet your criteria, which will mean that you’ll need to know how to analyze these stocks and their underlying companies to find out if they’re worth buying. You’ll have to know how to “read” a stock and its characteristics to find out if it carries good value or has a good chance of doing well going forward. Not only that, you’ll have to do it several times over for each stock you include in your portfolio. You’ll need to worry about a few things: you’ll need to make sure that you create a diversified portfolio of such stocks and that you track the performance of each stock over time. With mutual funds, fund managers typically do all this work, and this is what makes investing with funds the convenient choice.

So let’s summarize a few pros and cons behind mutual funds:

Pros and Cons of Mutual Funds

What are some of the benefits of using mutual funds?

• They’re easy to invest in. You can even set up an automatic savings program where you can dollar cost average directly into funds every month.
• You can buy a diversified basket of stocks with a small amount of money. A $100 can get you started!
• Mutual funds are a practical way to teach children how to invest. Don’t forget that investing early gives you a huge advantage on building wealth.
• A mutual fund has sufficient liquidity since you can buy and sell it at any time.
• Fund managers take care of all the investment legwork for you.
• There are mutual funds that have decent track records over the long term.

What are some of the disadvantages of mutual funds over other types of stock investments?

• You won’t have the kind of control over your mutual fund that you’ll have with individual stocks.
• Depending on the type of mutual fund you own, your fund may cost more to own than holding on to stocks due to annual fund management fees, sales loads, redemption fees and 12b-1 fees.
• Mutual funds get their pricing at the end of the day. When you buy or sell a mutual fund it’s usually done at the end of the day when you receive the fund’s closing price. You won’t get to buy and sell funds at real time. Now if you’re interested in a diversified investment that behaves more like a stock (but has the attributes of a fund), then try an ETF (or Exchange Traded Fund).

It is important to review the pros and cons to ensure that a mutual fund is the right investment for you. Most individuals start out with mutual funds when they invest. However, remember that there are no guarantees with most investments, so it’s important to understand your risks, to weigh them and then to make the right decisions that will allow you to sleep at night.

Why Invest In Mutual Funds Rather Than Individual Stocks? is a post from: Investing Toolkit

Here’s why you want to go beyond building a diversified stock portfolio and why you should invest in good mutual funds.

Are you a prudent investor? If you are, then you’re bound to practice good asset allocation. This means that you have worked to create and develop an investment portfolio that’s diversified and well balanced, such that your funds are allocated across various asset classes. This is what many investors do in order to control risk when they invest.

Let’s Review Asset Allocation

Asset allocation is a strategy that an investor performs in order to distribute their investments out among the different types of investment classes such as bonds, stocks or cash. Some popular asset classes that most investors end up investing in are the following:

• Bonds
• Cash
• Foreign Currency
• Collectibles
• Commodities
• Precious Metals
• Real Estate
• Stocks

The practice of diversifying your long term funds among all these investment categories does a lot to control the risk of loss. The reason for this is because the investment performance (or rates of return) of these asset classes are not well correlated: when one category is performing poorly, another may be doing well, thereby balancing out the total returns and performance of your overall portfolio.

Most asset classes are only related to each other in an indirect fashion (market relationships of distinct investment classes are loosely correlated), so that when one class is in a bullish trend, other classes may be down in the dumps. Because you can’t predict just how markets and investments will perform in the future, realize that your best performing asset for one year won’t necessarily be the best in the following year. Having an asset allocation strategy takes away the guesswork and worry over where you should put your money, year in and year out.

In short, the reasons for wanting to disperse your investments among different types of investment classes are these:

• It’s difficult to pick which asset class is going to turn out to be the most successful one during a given year.
• Individuals who jump around from one type of investment to another often end up less successful than those who have positions across many asset classes.

Historical Investment Returns of Asset Classes

To get some additional perspective on asset allocation, let’s check out just how well the different asset classes have performed over time. This cool Motley Fool table shows us how investment categories stack up against each other during the last decade:

Wow, this is quite an eye opener! Domestic stocks have performed dismally from 1999 through 2009 (with a return of -26% for the S & P 500 index), while gold and bonds have done the best. That’s why it’s not a good idea to be 100% invested in stocks! One day stocks will make a comeback, but who knows when that day will come?

Historical Investment Returns of Asset Classes Over The Last Decade is a post from: Investing Toolkit

Looking to day trade? If you are, then there are some things that you need to keep in mind before you get started. That way you can make the most out of your day trading activities as much as possible, if you choose to take that route. Some things to keep in mind include being realistic about your goals, knowing the basics of stocks, and having the right mindset without emotion getting in your way.

Want To Day Trade? 6 Tips Before You Start Trading

1. Be realistic.

When you’re realistic about something, you keep yourself grounded and level headed. If the outcome exceeds your expectations, then great. Isn’t it much better to be surprised when an investment turns out better than what you expect, rather than to be horribly disappointed when you’re unable to meet unrealistic goals?

In other words, know that when you invest today, you won’t automatically become rich tomorrow. Trading and investing are not get rich quickly schemes — they involve training, experience, education and practice. Good returns take time, so you’ll need to be patient.

2. Know the basics behind stocks and the markets.

To become a successful day trader, you must be highly knowledgeable about the markets. As a trader, you take what you know about a stock’s past history and current performance, and you make short-term trades based on that knowledge. Instead of looking at the fundamentals of a stock and the company behind it, you look at the stock’s short-term price variations and you take advantage of them in order to make money — that is, you employ technical analysis strategies. There’s a lot of learning involved in becoming a trader who can comfortably make quick market calls. You can certainly learn a lot about trading by checking into both free and paid services that give you the lowdown on technical analysis and market timing. Check out this post on the MarketClub Stock Trading System for more details!

3. Have the right mindset.

Don’t be a frightened trader. If you’re going to be a day trader, then you’ll need to get rid of the nerves. Unfortunately, many people make moves based on emotion — by doing so, they’re bound to make investing mistakes. Market timing is really not for the faint of heart: if you’re going to engage in this sort of activity, realize that it’s nothing short of gambling when you trade without a clear strategy. Of course, luck can make or break your move but you can stack the odds in your favor by applying the right trading strategies with the right mindset.

4. Prepare for stress and expenses.

Here’s the reality: it takes a LOT to become a day trader. You’ll have to keep watching the markets constantly, keeping your eyes on a million different things. Also, traders incur quite a lot of expenses, with training fees and trading commissions getting a large bite of their earnings.

5. Prepare for losses.

The big advice here is that you should never risk what you cannot afford to lose. New day traders are bound to make lots of mistakes when they start trading, but many such traders never really make money at all, no matter how long they engage in these activities.

6. Avoid investing.

Investors normally keep their money in the markets over long periods of time while day traders hold on to stocks for the shortest amount of time. Some traders choose to sit on their stocks for a day or two, while others may hold their positions for a little bit longer in order to ride the momentum of a stock or the market. But if you’re going to follow a market strategy, make sure it is a clear one: do not confuse investing with trading. It’s probably a bad idea to do both strategies at the same time when dealing with a stock.

Ultimately, day trading is really a “sport” that’s not suitable for most people. Chances are, you won’t make money this way and will likely lose money over time. If you want to be a successful stock investor, the best way to go about things is to invest for the long term, practicing diversification and asset allocation strategies. It may take a while to see your assets grow, but this way, you’ll have a much better chance at making any kind of money at all.

Want To Day Trade? Tips Before You Start Trading is a post from: Investing Toolkit

When you diversify your portfolio, you are making your money work for you in the best way possible. When working with your portfolio, diversification achieves one important thing: risk management. By diversifying, you are able to spread the risk around within your investment portfolio across various asset classes.

Know Yourself and Invest For Your Goals

When you invest, have your financial goals in mind — are you investing for the short term or the long term? You should also know how well you can stomach risk and how comfortable you are about investing in certain equities and other assets. Also realize that you are probably not going to be the next Warren Buffet, but that you can earn a decent amount through your investments.

One thing to keep in mind is that you should not overextend yourself when investing. Don’t get too excited and then purchase a bunch of stocks simply because you “feel good” about them. Investing takes time, strategy, planning and research. You also need to keep an eye on your portfolio on a regular basis so that you can make informed decisions about the best times to buy and sell. If you have too many stocks to follow, then you may find yourself overwhelmed. And you may feel more overwhelmed when you notice that you are not making any money. Experiencing losses in the market may exacerbate your nervousness or frustration with investing and may cause you to make bad moves. Be careful that you don’t fall into this trap!

How To Build A Diversified Stock Portfolio

When diversifying your investment portfolio, start out by thinking about what kind of asset classes to invest in. The various popular asset classes are stocks, bonds, precious metals, commodities, real estate and finally, cash. You’ll want to divvy up your money across these asset classes, and within each class, you may want to diversify even further. For instance, when investing in stocks, you should be placing your money in companies that belong to different industries or niches. You may even want to invest in different countries (and place your bucks in foreign securities). If you’ve decided to do some stock picking, try buying a stock or two in technology, a couple in retail, and several more in various industries that perform well. Better yet, buy a good mutual fund or an index fund! You’ll get instant diversification that way. Here’s how to invest in index funds.

Investment Diversification Controls Risk and Return

As I’ve mentioned, owning different types of investments means having stocks, bonds, and mutual funds in your portfolio. You may also consider real estate investing if you are prepared to take that step.

When you diversify in this way, you are managing your risk. That way when you lose in one investment, you can gain in another and possibly offset or exceed that loss. That is why investment diversification is so incredibly important. But before making any moves, make sure you are comfortable with your investing first so that you can successfully earn a return.

Know that there is a correlation between risk and return. When you take on more risk, usually by concentrating more of your money on a single, perhaps aggressive investment, you are basically hoping that your gamble here pays off. The concentrated investment may reward you with really awesome returns. Diversifying will dilute those returns and will lower your rewards, but will cushion you from potentially experiencing huge losses. The downside to making a gamble is of course, to lose out big time. Hence, hedging your bets by making a proper asset allocation and buying mutual funds will cushion you on the downside and may limit a bit of your upside, but at least, you’re increasing your chances of earning something with the money you are investing and putting on the line.

How To Build A Diversified Stock Portfolio is a post from: Investing Toolkit

Watching my 401K balance continue to drop makes me sick to my stomach such that I’ve begun to consider trying my hand at timing the market. I’ve always had a bit of gambler’s blood in me and wonder if I could conceivably learn how to trade successfully without losing my shirt. No doubt, there are benefits and many pitfalls with day trading and market timing when compared against long term investing, but the ultimate goal is the same: to make money. So I’d like to take this opportunity to investigate these investment strategies to see what will ultimately make sense for anyone who’d like to make money in the market. How should I approach the stock market?

Day Trading vs Long Term Investing: Exploring Investment Strategies

The volatile nature and quick liquidity of buying and selling on the same day is what excites and appeals to most day traders. The thought of a quick substantial increase (in paper profits) is very tempting and gets the blood surging. I have to admit, this is something I’ve been toying with for a while, and the more I hear about forex trading, the more I’m intrigued. But our losses can materialize as easily and quickly as our profits, and if we don’t have a complete understanding of the market and its conditions, we can lose everything in an instant. Expecting to make money on every trade is unrealistic and we must fully understand what we are doing.

While the emotional part of myself is interested in the possibility of learning how to trade stocks and foreign currency, my sane self knows that this is something I should not take lightly. That’s because I understand that long-term investing is what makes sense to most of us, and frankly, it’s what I think that average investors should ONLY think of doing. Especially those young enough to be able to really see the rewards of their initial investment.

When I was younger, I had invested in a mutual fund. But it was something I did not hold on to for long. At some point, I sold my shares. Where is that money now? I couldn’t tell you, but I certainly enjoyed spending it. Even back then, I don’t think I really thought about the long haul: if I had not given into the desire to reap those short-term rewards — that is, if I had stayed in my fund for the long term — then I’d have an even larger nest egg than I do now. Of course, all of this is in hindsight, but anyone can see that slow and steady investing can get you pretty far. Whereas to even come close to winning any profits through trading, you’d have to trade with enough funds and volume to make it worth your while. The risk of approaching the market as a day trader would be significant if you have no experience or skills in this area (which is the case for most who try their hand at this).

Investing Throughout History

The 90’s, the age of the dot comers, will go down in the history books forever. The instant boom in certain stocks caused chaotic behavior, with many people making money hand over fist. The boom didn’t last long and it caused an economic crisis, but gave birth to a whole new way of investing. Day trading is the legacy of that gilded age.

Today, the stock market investing climate is wholly different but the market will always remain a place of risk. No one can really predict what’s going to happen to our investments in the long term (although there’s a good chance that the trend will continue its upward march). Even solid and stable companies can go under during hard economic times. The collective mood of investors these days has been dour, as they watch their portfolios stagnate in the limbo brought about by our economic recession. But many others also see this as a great opportunity to buy low and leverage the stock market at its weakest point.

How To Approach Day Trading and Long Term Investing

While I believe that 95% of investors should really just stick to long term investing by learning how to invest in index funds, employing dollar cost averaging and seeking a good mutual fund, I can also understand how stock trading can make sense for a small segment of the investing population. Conventional wisdom reminds us that long term investing makes the best sense for our portfolios as it increases our chances of actually making money if we stick to the program. It is much much trickier to make money with day trading and market timing strategies since it will involve a lot of knowledge, experience, skill, luck and active work to have a chance at being successful in this endeavor. If we apply prudent risk management here, then it makes sense to involve only a small portion of our assets to this cause, if at all. Another option is to join fantasy trading (or virtual trading) platforms where we can have fun trading with fake money and a practice portfolio.

Okay maybe I’ve somehow convinced myself to just try out those online virtual stock trading games for now.

Day Trading vs Long Term Investing: Exploring Investment Strategies is a post from: Investing Toolkit

When you invest in the stock market, you’ll need to be aware of the investment risks. It’s also quite important to invest with your eyes open: to make sure you do enough due diligence before buying equities and putting your money to work in the stock market. While you are making your money work for you, you’re also exposing it to some risk after all. So tread carefully: do the research needed to pick the right stock investments. Now because there are so many stocks in the stock market universe to choose from, making investment choices can sometimes be rather daunting.

Should You Buy Individual Stocks?

If you do decide to pick individual stocks for your investment portfolio rather than to invest in good mutual funds, then you’ll need to be aware of the process involved in making stock picks. First, you must decide what you want to invest in: are you looking at a specific stock sector or company? There are several factors that you’ll need to look at:

1. Check stock and company performance.
When you’re evaluating a stock, check out its company’s performance in its given industry (or space); and also check on the historical performance of the stock itself. Check the following measures carefully:

• The stock’s P/E ratio (or price to earnings ratio) which tells you just how overvalued or undervalued a stock happens to be.
• The stock’s dividend yield, price-to-book and price-to-sales measures. Higher yields make a stock more attractive.

2. Gauge the state of the economy.
The economy can have quite the impact on companies, despite how the company itself may be performing. In recent years we have seen and heard companies claim that they’ve been performing well only to later witness these businesses decline in the face of a poor economy. Unfortunately, because of exogenous factors, it’s not unusual to come across companies that aren’t able to sustain themselves months or years after touting a good performance. They may blame the economy for their situation, and rightfully so.

3. Take a hard look at the company behind the stock.
Take a hard look at a business and determine how solid it is, fundamentally. You also need to look at their sales, revenues and profit margins. If a company is showing a decline in these measures, then you may want to think twice before buying their stock.

Stock Picking Pros and Cons

Whether or not you’re building a retirement portfolio, it’s good to be aware of why you’d want to buy individual stocks rather than mutual funds and other simpler investments. What are the pros and cons of picking your own stocks?

The Pros
If you develop your own individual stock portfolio, you:

• Know exactly where your money is invested in. By choosing your own stocks, you control your investments at a greater level.
• Learn more about the stock market and how it works, as you do your research of possible investments.
• Can do well and become highly rewarded with a more concentrated portfolio of individual stocks than you would with a diversified set of good mutual funds.
• Can have the satisfaction of selecting the stocks you like and enjoy. You may be a happy customer of a company like Apple, for instance, and you may want to own a piece of one of your favorite companies as a direct shareholder.

The Cons
The cons of stock picking include the following considerations:

• There are greater risks involved with managing individual stocks. You’ll now face specific company risk along with stock market risk and stock sector risk. If the company that your stock represents faces any trouble, you’ll feel a bigger impact from these developments than you would if you simply owned mutual funds.
• A concentrated stock portfolio can yield both higher risks and higher rewards. You may be prone to greater losses if you decide to pick stocks yourself and may face more volatility with individual picks than you would if you own a fund.
• Are you trying to beat the market? If so, it’ll be hard to do this if you aren’t a stock picking expert.
• Stock picking takes up more time than passive investing in index funds does.
• You don’t have the support and assistance of financial professionals who do the job of selecting stocks for you.

Some investors end up consulting with professional stock brokers to help them pick their stocks based on their risk profile, their budget, comfort zone, and any other factors that are important. Others prefer to focus on investing in mutual funds, and there are others still, who prefer to pick their own stocks because they’d rather put in the effort to research and make decisions themselves on certain stocks that may have captured their eye. So which approach is right? My opinion is that there’s a place for all investment strategies: there’s always room to diversify with mutual funds while dedicating a portion of your portfolio to individual stocks so that you may indulge your stock picking activities. I would personally keep between 4% to 20% of my portfolio in individual stocks, while the rest is invested in funds. That way, I get the best of both worlds while making sure I manage my risks!

Stock Picking Pros and Cons: Should You Buy Individual Stocks? is a post from: Investing Toolkit