Greetings! I hope and trust that this finds you well and enjoying life.
To further our discussion about investing basics and your retirement this week let’s examine stocks. When you buy a company’s stock, you’re purchasing a share of ownership in that business. You become one of the company’s stockholders. Your percentage of ownership in a company also represents your share of the risks taken and profits generated by the company. If the company does well, your share of its earnings will be proportionate to how much of the company’s stock you own. Of course, your share of any loss also will reflect your percentage of ownership.
|Stocks by size based on market capitalization|
|Large cap||· $10+ billion
· Widely bought and sold
· Often are well-known names
|Midcap||· $2 billion-$10 billion
· Somewhat smaller than large caps
|Small cap||· $200 million-$2 billion
· Less widely traded
· Fewer institutional investors
|Microcap||· $20 million-$200 million
· May trade infrequently
· More difficult to research
If you purchase stock, you can make money in one of two ways. The company’s board of directors can decide to distribute a portion of the company’s profits to its shareholders as dividends, which can provide you with income. Also, if the value of the stock rises, you may be able to sell your stock for more than you paid for it. Of course, if the value of the stock has declined, you’ll lose money.
The role of stocks in your retirement portfolio may be important. Though past performance is no guarantee of future results, stocks historically have had greater potential for higher long-term total returns than cash alternatives or bonds. However, that potential for greater returns comes with greater risk of volatility and potential for loss. You can lose part or all of the money you invest in a stock. Because of that volatility, stock investments may not be appropriate for money you count on to be available in the short term. You’ll need to think about whether you have the financial and emotional ability to ride out those ups and downs as you try for greater returns.
The universe of stock mutual funds and exchange-traded funds (ETF’s) offers flexibility to construct a portfolio that is tailored to your needs. There are many different types of stock, and many different ways to diversify your stock holdings.
Growth stocks are usually characterized by corporate earnings that are increasing at a faster rate than their industry average or the overall market. Income stocks (for example, utilities or financial companies) generally offer higher dividend yields than market averages. Value stocks are typically characterized by selling at a low price relative to a company’s sales, earnings, or book value.
With stocks, it’s especially important to diversify your holdings. That way, if one company is in trouble, it won’t have as much impact on your overall return as it would if it represented your entire retirement portfolio. Other important aspects of investing in stocks are that you buy quality and sell it at an appropriate time. Both of these aspects of stock ownership are addressed when you utilize mutual funds and let the professionals work for you. If you have questions about the above or feel that we can help in any way with your retirement planning don’t hesitate to call.
Jeff Christian CFP, CRPC
A cloudy day is no match for a sunny disposition.
William Arthur Ward