Choosing the Right Stock Type

calculatorIf you are using software that allows you to buy stocks, or don’t have much contact with a stock broker or retirement planner, then you may not realize there are three main types of stock. Today, many people mistakenly believe that they must either invest directly in companies or opt for mutual funds.

In most cases, this is a recipe for disaster because each stock comes with its advantages and disadvantages. As with diversifying your investments, diversifying stock types is also very important.

Three Basic Types of Stock–How they Work and Suitable Ratios?

During the process of investing, you should always know the risks and benefits associated with these stock types as well as how much of your portfolio should be dedicated to each one:

* Individual Stocks – These are direct investments in specific companies. These stocks typically make money very quickly, based on individual company success. On the other side of the equation, picking 5 – 6 companies out of several million in any given category can be very difficult.

To make matters worse, even businesses that look good on paper may be in the process of closing up because of unforeseen economic factors. Unless you have direct experience with a company and know how well it is doing, you are best served by not using individual stocks as part of each section of your portfolio.

If you feel compelled to invest in a company then save that urge for the misc section of your portfolio.

* Managed Mutual Funds – In essence, when you invest in managed mutual funds, you are trying to do better than a pre-set average. Most professional investors use the S&P 500 as a benchmark to determine if their mutual fund investments are successful or not.

Unfortunately, most of the time mutual funds rarely break– even let alone make a profit. If you have mutual funds in any part of your portfolio, you should review them carefully and consider selling them off. As with individual stocks, you should save mutual funds for the misc portion of your portfolio instead of using them as a routine investment tool.

* Stock Indexes: Your Key to Smart Investing – Basically, when you invest in stock indexes, you are buying stock in a group of companies that have specific criteria. If the group does well overall, then you will make a profit— even though investors rarely sell off this type of stock. Since investing fees are much lower for this category, you will also find it easier to recap your investment faster.

There is no question that picking profitable stocks can be a complicated task. As with so many other things, your odds of making a profit will improve with an increased number of choices. Today, you will be best served by investing in stock indexes since you will have a chance to invest in many companies at once via the law of averages. From there on out, if you are truly interested in specific companies, you can always invest in them directly.

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