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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:

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


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?

• Price

Set a price level (Example: only accept a stock that has a price of $30 or less)

• Income or growth stocks

Do you want to be paid dividends or do you prefer capital appreciation?

• Dividend Yield

This is best used if you want income growth, not capital gains.

• Riskiness of the stock

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?

• Familiarity

How well do you want to know the company?

• Exchange Listing

Do you have a preference about which exchange the company is listed on?  

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.

• Buy and Hold

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.

• Dollar-Cost Averaging

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.

• Constant-Dollar Plan

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:

• Loss of Capital

This is the biggest risk you face. This is the part or total loss the money you used for your investments.

• Business Risk

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.

• Liquidity Risk

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.

• Interest Rate Risk

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.

• Systematic Risk

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.

• Purchasing Power Risk

The purchasing power of your money decrease with inflation.

• Taxation Risk

Changes in the tax laws for dividend income and capital gains could change the demand for these types of investments.