- Looking at the different ways of investing your money

- Discovering the risks and rewards of investing The fact that you’ve picked up this article and read this far means that you are more than a little interested in getting some real returns on the money you’ve saved. Before you jump in to the stock market with both feet, read this article to get a sense of the risks and rewards involved in investing in the stock market.

Different Ways of Investing in the Stock Market

You have many ways of investing in the stock market. This article deals with only one of those ways, namely, buying stocks on your own for your own personal portfolio. Investing in stocks for yourself is perhaps the most challenging form of stock investing, but it can also be the most satisfying and possibly the most rewarding. You have to decide for yourself whether investing on your own is the way to go for you. To help you decide, I list some of the other ways to invest in stocks. You may be surprised I hope, pleasantly to learn that you may already be an active participants in the stock market.

Investing as part of a group

There are three principal ways in which you may already be invested in the stock market:

- As an owner of life insurance. If you own life insurance, your insurance company very likely has invested some of its reserve funds into various safe investments, including high-quality stocks.

- As a participant in a company pension plan. If you’re part of a pension plan at work, that pension system will take your dollars along with the dollars of thousands of other employees and invest them in stocks, bonds, and the like.

- As a participant in a company 401(k) program. If you work for a company that offers its employees a 401(k) option and you’ve bought into it (generally a good idea), you almost certainly will be invested in a mutual fund, which has a stock component. A mutual fund usually consists of a collection of stocks and bonds, but the fund may also contain other types of securities such as mortgages, cash accounts, and so forth. (I go into more detail about the pluses and minuses of mutual funds later in this article.) If you’re a bit hazy on what’s going on with your 401(k) plan, I recommend that you pick up CliffsNotes Investing for the First Time that deals with these plans or talk to a qualified representative from your company. Take a minute to think about funds you may have invested in these ways. If you don’t already know the details about these investments, ask the people who administer these funds for you to supply you with some background information on these investments. Doing so is a wonderful way to get a first peak at the stock market.

Investing in stocks on your own

There are two basic ways to buy stocks on your own.

- Buy stocks in one or several companies and assemble your own personal portfolio. Almost all the remainder of this article is devoted to this way of investing in stocks.

- Purchase a package of stocks that someone else has assembled and manages for you. This package of stocks is a mutual fund. I give you a quick overview of mutual funds here but if you are interested in this form of investing, pick up CliffsNotes Investing in Mutual Funds. A mutual fund is not restricted to owning only stocks but most likely will also have some bonds and cash reserves among its assets. An important aspect of all mutual funds is that they are professionally managed. Mutual funds offer you a portfolio of carefully selected stocks, a diversified investment option (see Chapter 8 for why this is important), professional management, and the opportunity to invest with minimal cash. Mutual funds can play an important part of a balanced investment plan, but you need to do careful research to find a fund that will provide a return equal to the stock market as a whole.

The Rewards of Investing

There are many good reasons to invest in the stock market on your own. Among the more common reasons:

- You gain the potential for substantially greater growth and income in stocks than in many other types of savings and investments.

- Your money is available to you as you need it.

- You have greater control of your assets than in a mutual fund.

Greater growth potential

Keeping your money in a regular savings account does provide some return on your money, but you certainly don’t get much of a return. When you receive your next bank statement, be sure to check the interest rates that your bank is paying on your money. Rates of interests under 2% are common. These pitifully low rates of return offer almost no incentive to systematically accumulate assets. Investing your savings or a portion of your savings in stocks can offer the potential for greater growth than placing your money in an average savings account. If the rate of return you receive on your savings account is close to or below the current inflation rate, you can actually be losing value on bank savings accounts. Better accessibility to your money The money that you invest in stocks that you purchase on your own that you do not place in an IRA or 401(k) is available to you whenever you want or need that money. You can simply sell your stock when you’re ready to make a major purchase, such as making the down payment on your first home. While you can cash in stocks or other securities in which you’ve invested whenever you want, doing so isn’t always your best choice. Unless you’re facing an emergency, early sale of any investment including stocks works against your long-term savings goals.

Greater control

You also gain greater control over your investments by purchasing stocks on your own. For example, you may be willing to take greater risks to earn greater rewards than many mutual fund managers. Even at the same level of risk, you have at least a good possibility that you can do better than many fund managers with the research techniques that I introduce in Chapters 4 and 5. Regardless of your performance compared to professional fund managers, you will be free of the 2 to 5% management and other fees which mutual funds commonly charge and which diminish your overall returns.

The Risks of Investing

Anyone who has even a passing interest in getting into stock investments has very likely heard the conventional wisdom that with patience everybody can make big money in stocks. It is a well-established fact that for the past 75 years the stock market has averaged a compound gain of more than 15%. There have been some good years, some bad years, and some great years. When averaged out, whatever money you put in the stock market should double in five years or less, or so it would seem. Despite the impressive historical record of steadily upward trending performance in the stock market as a whole, you have good reasons to be at least a little bit cautious. Even though the stock market has broken into record territory, there’s no certainty about how high or how low it may go in the future.