Investors today have a multitude of options available to them when trying to grow their assets. These options allow for the design of very creative investment strategies that can be tailored to an individual's needs and goals.
However, this same plethora of choices has also led to a high level of complication that can cause confusion and costly mistakes.
Over the next few months, we will take a look at some of the more poplar options used today, give a brief description and offer some questions people should try to answer before choosing an investment option. Let's start with stocks.
When you purchase a publicly traded stock, you are buying a piece of that company. You are now a part owner of a corporation.
Like any business owner, if your company does well and grows, the price of your stock will go up and you could make a profit via capital gains and-or dividends paid out by the company.
But there is a very real risk the company will not be successful, leading to a loss of your investment.
Question: Do I have enough money to build a diversified portfolio of individual stocks?
Owning stocks directly has many benefits, but cost is not necessarily one of them. If a company performs well over a period of time and makes a profit for its investors, the price of the stock will rise.
Amazon is a great example of this. When the stock first went public in 1997 it sold for $18 a share. Today, the price per share is around $1,872. Price and past performance does not guarantee investors will make money when they buy the stock, but it will drive up the price.
When paying $200 to $500 to $1,800 a share, it can be very costly to build a properly diversified portfolio.
Question: Do I understand the type of stock I am buying?
In an economy the size of the U.S., you are going to have companies of many different "shapes and sizes." This leads to stocks being categorized in a variety of ways. Examples include market capitalization (large, mid, small and micro-cap), industry and sector, defensive and cyclical and growth and value.
Which category a stock falls into does not make it an inherently better investment, but could play a factor as to whether it is suitable to a client on an individual level.
Remember to clearly define your goals, do your homework and speak to your trusted financial advisors when deciding if individually owned stocks should be part of your financial strategy.
Luke Gawronski, a financial planner with Barnum Financial Group, is a registered representative of and offers securities, investment advisory and financial planning services through MML Investors Services, LLC. Member SIPC. firstname.lastname@example.org