Investing in the Market
There is a lot to know about investments, such as how to choose a strategy that meets your needs and goals and which investments to peruse and which to let go. Some investors prefer to invest in property and others prefer to invest in stocks. Depending on your research and level of knowledge both can be good for wealth creation if expert advice is followed.
If your strategy is to invest in property an expert mortgage broker can help you compare home loans and different gearing options. If however, you are interested in investing in shares and stocks then this guide will prove advantageous with its focus on speculation and investment grade stocks.
In general terms there are two kinds of private participants in the stock market, investors and speculators.
- Typically investors are those that buy a part share in a business which will yield them an income stream in the form of dividends and franking credits over time and, if the business prospers, an increase in the market value of their investment.
- Speculators also called traders buy and sell shares with the aim of making a profit from favourable changes in the price of the stocks.
While speculators will be prepared to buy and sell anything that moves in price, investors should know that there are two basic types of businesses that are listed on the stock market:
Investment Grade Stocks which can be defined quite easily, they are stocks that have a history of making profits and paying dividends. If possible, investors should seek out the history of earnings and dividends over at least ten years. This is not always possible because the business has not been listed on the stock market that long. In that case investors should seek to read the prospectus on the ASX website www.asx.com.au in the section on company announcements. This may provide information on these metrics for the time before the stock was listed.
Failing that, and in all cases, the best investments will be in companies that have shown consistency and growth in earnings and dividends. This may have to be mitigated to allow for recessionary periods in the economy.
Speculation Grade Stocks, which can also be defined quite easily as stocks that have not yet been able to make consistent profits and pay dividends. This group will comprise stocks such as:
- New businesses that have raised seed money to try to prove up a business plan.
- Resources companies that have raised money to search for an economic resource.
- Biotech or internet companies that are seeking to launch a new and unproven business idea or to make a new discovery.
The key thing to remember is that, if an investor buys speculative grade stocks, they are not really investing, but speculating. If they hold these stocks and the management do not make the business work or they do not discover something, before the money runs out, then these stocks will end up worthless and no income stream will have been enjoyed during the process.
Make sure you know whether you are an investor or a speculator and which stocks are appropriate to your intended investment activities.
Colin Nicholson Building Wealth in the Stock Market