If you’re a novice investor or a rookie thinking of opening your first account you may be comparing investment options. There are a lot of choices when it comes to where you can place your money such as mutual funds, bonds, real estate and stocks. Each investment option has their own pros and cons depending on your goals for the money as well as your tolerance for risk.
The pros of investing in stocks
Stocks allow you to pin point one specific investment. When you buy a company’s stock you are buying a piece of that company and therefore investing in their future growth. Good stocks to buy for your first investment include large, well known companies that have a history of growth (i.e. Fortune 500 companies or Blue Chip Stocks) as well as companies you like.
If you are buying stocks for the first time a good place to start is to buy the stock of a company that you like or a product you use on a regular basis. If your computer, MP3 player and tablet are all made by Apple then maybe you should buy their stock.
If you drink Diet Coke everyday then maybe a good first investment is buying stock in The Coca Cola Company. The idea behind this is if you like it others will too and therefore the company will grow a.k.a. be profitable.
Stocks can be profitable in two ways: the unit price can grow and they can pay a dividend. If you buy a stock at $50 per unit and sell it at $75 per unit you just made a $25 per unit profit and in the eyes of the IRS that is called a capital gain. The IRS requires all capital gains to be declared on your annual income taxes and at the same time capital losses can also be claimed.
Dividends are paid out to investors usually on a monthly or annual basis. When the value of a company increase so does the stock price. When the company makes a profit they pay it out to their stock holders in the form of a dividend. It is stated as a profit per unit. As an example, according to NASDAQ JP Morgan Chase paid out $0.44 per stock last quarter.
The cons of buying stocks
Just as buying stock lets you invest in the company of your choice, it is only investing in one company. As a new investor you definitely don’t want to put all your eggs in one basket when it comes to investing.
When you buy stock you are very vulnerable to stock market fluctuations. If the market drops so will the value of your stock price and overall investment. If you invest $5,000 you have to be comfortable investing for the long term and weathering the storm of fluctuations in the short term.
Stocks can be a great investment option for a well balanced portfolio. The two things to remember when buying stocks are to ignore short term fluctuations if you are investing for the long term and don’t try and time the market by buying and selling on a regular basis. This can lead to losses and lots of fees in the form of trading charges.