Fantasy
Stock Market will continue to bring you the information
that is vital to understanding investing in the stock
markets. Fantasy Stock Market does not give investment
advice. When you are ready to invest your own money, please
seek the advice of a professional.
Please visit our other pages for additional information:
Financial Calculators -
find answers to some of your financial questions with
any of our 122 calculators
Stock Quotes - get the current
price of stocks and mutual funds listed on major US Exchanges
Definitions - a glossary
of commonly used and important stock market terms
Stocks by Industry
- listing of companies by sector and industry
Mutual Fund Introduction
- Introduction into the types of mutual funds,
definitions to common terms and more. |
Tips on Investing:
Setting Your Goals
Having clear and defined goals is essential to successful
investing. These are some of the questions you need to
answer before investing. Are you investing in the short-term
or long term? How much money do you have to invest? How
much money will you need in the future? (For college education,
a home, a car, vacations, retirement, etc.) How much money
are you able to invest without changing your lifestyle?
How much of a return do you reasonable expect from your
investment? How risk tolerant are you? (Your risk tolerance
indicates your willingness, or unwillingness, to lose
your investment. If your are risk tolerant, you are more
accepting of losing part or all of your investment.)
Research is Essential
The more information you can get, the better. Look at
company information (annual reports, prospectus, etc.),
newspapers, magazines, television, the Internet, etc.
Also, contact a professional broker with any questions
you may have. However, be cautious of information received
from "experts" from chat-rooms. This information
is rarely reliable.
Take time to learn about the companies you may be interest
in investing with. Visit their web sites and read their
annual reports. Understand what industry they are in,
how has their past performance been and where are they
headed in the future. What are their growth patterns like?
Do they have steady growth patterns or are they cyclical?
Do they follow the growth patterns of their competitors
and their industry? How is the industry performing? Is
the company’s growth through sales, acquisition of
companies or increased market share? How do they make
money?
Diversify your Portfolio
It is better to have different types of investments in
your portfolio to decrease your investment risk. It’s
a good idea to have 15-20 different stocks from 5 to 10
different industries in your portfolio. Also include several
different types of mutual funds, (i.e. growth and income,
small cap, equity income, emerging markets). Select your
bonds based upon the amount of risk you are willing to
take. Various types of bonds include: corporate A-Rated,
US government, short investment grade, and general municipal.
You should also keep about 10% of your portfolio in cash.
Other investment you may want to include in your portfolio
are IRA’s, 401(k) Plans, savings accounts, money
market funds, REITs, and insurance funds.
Stock Screens:
A stock screen is a check-list to help you establish
a set of criteria for the stocks you may want to
invest in. Listed are a few criteria you can use to narrow
down your stock choices.
- Investment Objective
- Time frame - When do you need
the money?
How much money will you need at the end
of the investment period?
Set a price level (Example: only accept
a stock that has a price of $30 or less)
Do you want to be paid dividends or do
you prefer capital appreciation?
This is best used if you want income growth,
not capital gains.
Do you prefer Blue Chip or Small Cap stocks?
- P/E Ratio (Price per Earnings
Ratio)
Best if you use current price/forecasted
EPS (Earnings per Share).
Do your require a high or low P/E Ratio?
- Relationship of current price to the
52-week high and low
Do you want to invest in the stock when
it's near the 52-week low or 52-week high?
How well do you want to know the company?
Do you have a preference about which exchange
the company is listed on? |
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Investment Strategies
When selecting an investment strategy, keep in mind your
investment objective, current financial position and risk
tolerance. The discipline and research required to develop
your long-term investment plan will help you avoid the
risks associated with the desire of a quick profit.
This strategy is exactly what is says,
you buy and hold the investments in your portfolio for
a long period of time. Historically, the stock market
has moved upward, increasing in value over time. The buy
and hold strategy puts you in a position to profit from
the long-term upward trend of the stock market. Selecting
investments to buy and hold can sometimes be tricky. You
need to look for industry leaders, companies with financial
strength, and companies who are increasing their market
share, which ensures long-term growth.
This strategy is also a long-term strategy
where you invest the same amount of money in stocks, mutual
funds, bonds, etc. at regular time intervals (i.e. monthly,
quarterly, or yearly), regardless of the price of the
investment. When the price of the investment decreases,
you are able to buy more with your fixed amount of money.
Conversely, when the price of the investment increases,
you are able to buy less with your fixed amount of money.
The advantage is you are buying fewer shares at a higher
price and more shares at a lower price, thereby making
a larger profit due to the historical tendency of the
markets to increase over time.
This strategy involves maintaining a fixed
dollar amount of a portfolio in stocks, mutual funds,
bonds, cash, etc. in your portfolio. For example, if the
price of a stock were to increase, you would sell enough
shares to bring you back to your original fixed dollar
amount. However, if the price of the stock were to decrease,
you would need to buy enough shares to bring you back
up to the original fixed dollar amount. This strategy
forces you to take the gains when a stock’s price
rises. An investor has a tendency to buy when the stock
price is increasing, or when a stock has reached a peak.
Conversely, when a stock’s price falls, you must
purchase more stocks, which increases your purchasing
power and lowers the overall average cost of the shares
in your portfolio. |
Risks Associated with Investing
What are the risks?
These are just some the of risks associate with investing
in the stock market:
This is the biggest risk you face. This
is the part or total loss the money you used for your
investments.
The company whose stock you invested in
may not be able to generate sales or may not be able to
grow and compete with competitors. This may result in
the price of the stock falling, or the business may even
fail, leaving the stock worthless.
- Non-Diversification (Unsystematic Risk)
This is the "putting all your eggs
in one basket" theory. This occurs when you purchase
only one stock for your portfolio. If the stock falls
40%, then you have lost 40% of your investment.
When you are ready to sell your position
in a security, there may be too few investors willing
to purchase your position. This could result in high transaction
fees which would lower your expected return or increase
your expected loss.
This risk affects all fixed income securities
(preferred stocks, bonds, CDs, etc.). If your purchase
a fixed security, your risk is when the interest rates
rise shortly after your purchase. The increase in interest
rates would lower the value of your security. The price
of your lower-yield security would fall.
Also known as Market Risk, this is the
risk associate with the movements in the overall market.
If the overall market declines, as it did in October 1987,
the value of your portfolio would also decline.
The purchasing power of your money decrease
with inflation.
Changes in the tax laws for dividend income
and capital gains could change the demand for these types
of investments. |
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