Investing and saving money for your future has always been of pinnacle importance, and it is becoming increasingly more so due to the economy in which we are living. Pensions are slowly being phased out in many companies and replaced with 401k plans, the solvency and sustainability of social security is in question for future retirees, and the costs of healthcare and consumer goods continue to rise. Take the uncertainty out of your economic future by taking control of it now. There are a few factors to keep in mind when deciding in which types of products to invest: your time horizon, personal risk tolerance, and diversification of investments. Once you have determined what type of investor you are, it is important to look at the different type of investments. Typically, stocks and mutual funds can be broken down into two major categories: growth and value.
Growth investments are generally geared toward increasing profit by picking stocks or mutual funds which have a growth rate that is outpacing the market. Many times, growth stocks have high price to earnings ratios. When a stock is rapidly growing, it can draw more investors and drive the price up. Due to the nature of this type of investment, the swift growth can lead to overvaluation.
Value investments are those that are undervalued and have potential for growth. Buy low, sell high. That is the basic idea of buying and selling stocks to make a profit; although, it’s not nearly as easy as it sounds. Timing is everything. It is hard to know when a stock is at its low and time to buy; it’s also hard to know when a stock has hit a high for maximum profit. Investing in value stocks is one way of trying to achieve that goal. Perhaps a value stock is undervalued based on current price, but has strong attributes, such as dividends, earnings, or solid sales. However, it is also important to look at why the stock is trading at a low price. Is the company party to a lawsuit, recall, or merger? A stock’s price can remain stagnantly low for quite a while due to negative market perception. Investing in a company whose stock pays dividends is beneficial, nevertheless, for investors that are seeking income. If you don’t need the income in your current situation though, you can always reinvest the dividend.